When the Games begin, the Australian economy will be in its longest sustained economic recovery in the past two decades -- with no sign of ending anytime soon.  The Games themselves are a boom to the Australian economy.  One study (Arthur Anderson/CREA, 1999) has estimated that the Olympics will add an additional $6.5 billion to Australia's GDP for the twelve year period 1994-95 to 2005-06.

Hosting the Olympic Games stimulates an economy's exports, tourism, and other international services (e.g., sponsorship and media broadcast rights) associated with promoting the Games.  Other direct benefits include investment spending for infrastructure projects such as Olympic facilities, airport upgrades, and road and railway improvements.  As a direct consequence of these projects, the unemployment rate in Australia has fallen to 6.7% in May from 7.4% a year earlier; and unemployment is expected to fall further in the months ahead.

While part of Australia's recent economic expansion can be attributed to hosting the Olympics, another part can be attributed to the economic strength of its trading partners.  Australia exports approximately 15% of its GDP -- primarily coal, gold, iron ore, aluminum, and wheat.  Its economy does well when these commodity prices rise and its trading partners are doing well.  With the exception of Japan (1st) and Indonesia (10th), Australia's top 10 export market economies are in various stages of  economic recovery.  The United States (2nd) is in its longest economic recovery on record.  So is the United Kingdom (5th).  Korea (3rd), Taiwan (6th), China (7th), Singapore (8th) and Hong Kong (9th) have all rebounded from the 1997-98 Asian financial crisis.  New Zealand (4th) is currently growing at a 3-4% annual rate.

According to a recent poll taken by The Economist magazine, Australia's economy is forecast to grow at 4.2 per cent this year and 3.7 per cent next year.  However, inflation is also predicted to rise to 4.3%.  Already, the central bank is tightening (interest rates are rising) to curtail the expected acceleration in prices.  There is a great deal of uncertainty in Australia revolving around its recent tax reform measure.  This year marginal income tax rates in Australia were cut drastically.  For the middle income groups, for example, the marginal tax rate was cut from 44.5 per cent to 31.5 per cent.  To offset these income tax cuts, the government initiated a 10 per cent goods and services tax (GST) on most items sold in Australia.  The GST went into effect on July 1.  Controversy surrounds this ambitious tax reform package, and it will be an economist's playground to figure out its economic effects in the years ahead.

Some have suggested that the recent monetary tightening in Australia is directly linked to the new tax structure out of fear that it might precipitate a wage-price spiral and be inflationary on balance.  However, Mr. IF Macfarlane, Governor, to the Economic Society of Australia, addressed the issue in a speech he delivered in Melbourne in February:  "I have said on a number of occasions and will say so again today -- monetary policy was not tightened because of the GST.  The tightening would have happened without the impending GST, just as it has in the United States, the United Kingdom, New Zealand, the Euro Area, Canada, Sweden, etc.  We at the Reserve Bank are still operating on the assumption that the GST will affect prices only on a one-for-one basis, and that wages will not be raised to compensate for the GST.  The second assumption reflects the fact that reductions in income taxes will more than offset the rise in prices due to the GST."

Quite aside from the effects of the GST, it is clear from the graph above that Australia is experiencing an economic expansion that is longer than any other in the previous two decades.  Combining the stimulus effects of the Olympics and a strong economic performance by its trading partners, it would be logical to assume that demand-pull inflationary pressures are building up in Australia.  It is probably prudent for the central bank to lean against the wind and tighten monetary policy.  The trick is to engineer a "soft landing".  Thus, Australia represents still another testing ground in the industrialized world to see if monetary policy can be used to contain inflationary forces without causing a recession.

Recommended Links:

Reserve Bank of Australia: http://www.rba.gov.au

Australian Bureau of Statistics: http://www.abs.gov.au

Australian Department of Foreign Affairs and Trade: http://www.dfat.gov.au

AustradeOnline: http://www.austrade.gov.au/Australian

Official  Site of the Sydney 2000 Olympic Games: http://www.olympics.com
 

Periodically, Economics Education Products sponsors a scholarship contest for students.  The image on the left won first prize in our 1999 contest.  It was submitted by a high school student in northern California (USA).  She sketched the picture with colored pencil and composed the text file.  The diagram illustrates an increase in aggregate demand, which expands economic activity (Q) but also causes an increase in the general price level (P).  This current event has been incorporated into the 2000 edtion of The Global Economics Game.  You may click on the image to obtain more information about our contest and view other award winning entries.