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The resilience of the Australian economy has regressed over the last decade
Indicator: Multifactor productivity
Why is this theme important?
Australians told us that in response to recent global economic downturns and natural disasters, they aspired to an economy able to cope with unexpected crises and to maintain a good standard of living for Australians. This included an economy which can respond flexibly to events and where resources can be drawn upon, to protect against risk. People also aspired to a nation with a broad level of economic stability that enables the building up of resources that can be drawn upon in a crisis. Having knowledge of vulnerabilities and opportunities within the economy was also seen as important.
How have we decided there has been regress?
We have decided the resilience of Australia’s economy has regressed over the decade because multifactor productivity (our headline progress indicator for a resilient economy) has decreased.
Between 2001-02 and 2011-12, multifactor productivity in Australia declined 2.1%. This means that growth in output (i.e. goods and services) of the Australian market sector has been outpaced by growth in its inputs (i.e. capital and labour) over the past decade. An economy with a lower level of productivity is likely to be less capable at withstanding and recovering from economic downturns.
Why this headline progress indicator?
Multifactor productivity tells us about the resilience of Australia’s economy.
Multifactor productivity is considered a good measure of progress for a resilient economy because it measures the growth in output (i.e. goods and services) of the Australian market sector relative to growth in its inputs (i.e. capital and labour). An increasingly efficient and productive economy is more likely to be able withstand volatile or rapidly changing economic conditions. Over the long-term, multifactor productivity demonstrates how much the nation has improved in terms of the way it produces goods and services (technical progress). In this sense the measure is able to provide a sense of how resilient the economy is and its capacity to respond to shocks and changing economic conditions. In the short term however, the measure can also reflect unexplained factors such as cyclical variations in labour and capital utilisation, economies of scale, and measurement error. In particular, multifactor productivity may be influenced by not measuring certain natural resource inputs, such as subsoil assets, which can greatly influence production in certain industries including agriculture, forestry and fishing, mining and electricity, gas, water and waste services.
This indicator is an indirect measure of the concept of a resilient economy as described above (based on Aspirations for our Nation).
The data source is of high quality.
Let's break it down!
Use the drop down menu on the graph to look at other breakdowns of the indicator (graphs are also available on the further info page).
The decline in multifactor productivity during the most recent decade lies in contrast to the previous decade when productivity in Australia generally increased. During the late-90s and early-2000s, multifactor productivity generally grew year-on-year until it reached its peak in the 2003-04 financial year.
But that is not the whole story...
There is more to a resilient economy than multifactor productivity. Look through the other tabs on this page to see if the other elements of a resilient economy have progressed.
Check out our further info page for useful links, a glossary and references relating to this chapter.
Economic flexibility in Australia has progressed over the last decade
Indicator: Average duration of unemployment
Why is this element important?
Economic flexibility is important as it ensures the economy remains resilient and can cope with unexpected crises. It is also important from the individual perspective because it ensures that people do not suffer from entrenched disadvantage, associated with prolonged unemployment.
We have decided that economic flexibility in Australia has progressed over the last decade because the average duration of unemployment (our progress indicator for flexibility) has decreased.
In 2002, the average number of weeks an individual was unemployed was 48 weeks and in 2012 this number decreased to 37 weeks.
For the first half of the previous decade, the average duration of unemployment declined as a result of Australia's strong economic growth, from 48 weeks on average in 2002 to 33 weeks on average in 2009. However, in the wake of the global financial crisis, the average duration of unemployment rose to 37 weeks on average in 2011. Though the average has not consistently decreased over the decade, between 2002 and 2012 the duration of unemployment did decrease on average by 11 weeks.
Why this progress indicator?
Duration of unemployment tells us about economic flexibility as part of the aspiration for a resilient economy.
Average duration of unemployment is considered a good measure of the progress of economic flexibility because it provides an understanding of how rapidly the economy responds to changing economic circumstances. Although an indicator of economic progress, it also has social implications. It provides an indication of how quickly or slowly individuals are able to transition back into paid work or out of the labour force after a period of unemployment. In this sense, this indicator demonstrates the extent to which individuals can rebound from periods of unemployment and become redeployed back into the labour market.
One limitation of the indicator in terms of assessing economic flexibility is that a period of unemployment does not always end with a person re-entering the workforce - individuals may instead choose to give up looking for work altogether. The indicator will therefore in part also reflect whether people have become discouraged job seekers.
This indicator is a partial measure of economic flexibility.
The data source is of high quality.
Let's break it down!
Average duration of unemployment for males decreased from 54 weeks in 2002 on average, to 39 weeks in 2012, a reduction of 15 weeks. For females the reduction was smaller, in 2002 it was 41 weeks for the average duration of unemployment, compared with 35 weeks in 2012.
Use the drop down menu on the graph to look at other breakdowns of the indicator (graphs are also available on the further info page).
But that is not the whole story...
There is more to a resilient economy than economic flexibility. Look through the other tabs on this page to see if the other elements of a resilient economy have progressed.
Check out our further info page for useful links, a glossary and references relating to this chapter.
A data gap currently exists for insurance
In MAP there are several types of data gaps where:
1. the concept is not yet developed enough to measure;
2. the concept is important for progress but may not lend itself to meaningful measurement;
3. there is no data of sufficient quality to inform on progress; or
4. there is only one data point, so a progress assessment cannot be made.
A range of possible indicators have been considered for insurance but no single measure was considered suitable for this multidimensional indicator. A suitable measure should provide an indication of the level of insurance within the Australian economy as well as the level of insurance necessary to manage the total risk present. Although measures of the former are available, progress against this indicator cannot be meaningfully evaluated as there is insufficient data available about the latter. Furthermore, the concept of insurance is inherently broad and protection against risk or injury can take many forms besides insurance premiums. A fully comprehensive indicator should recognise these forms of insurance, such as the installation of an alarm or the construction of a flood levy. In order to capture the spirit of this idea in a measure, further development will need to be undertaken.
But that is not the whole story...
There is more to a resilient economy than insurance. Look through the other tabs on this page to see if the other elements of a resilient economy have progressed.
Check out our further info page for useful links, a glossary and references relating to this chapter.
Economic stability in Australia has progressed over the last decade
Indicator: Consumer Price Index
Why is this element important?
Australians told us that a stable economy was important for national progress. In response to structural changes in the broader economy, many aspired to ensure that economic disorder was no barrier to improving the wellbeing of Australians.
We have we decided that economic stability in Australia has progressed over the last decade because the consumer price index (CPI) (our progress indicator for stability) has maintained a moderate rate of growth.
Between 2001-02 and 2011-12, the rate of annual inflation expressed by the CPI remained relatively low, at around 3 per cent per annum. This meets the Reserve Bank's target for monetary policy in Australia, i.e. an inflation rate of 2–3 per cent, on average. A stable rate of growth in the CPI is considered progress because this rate indicates that inflation will not materially distort economic decisions in the community. Seeking to achieve a 2–3 per cent growth rate, also provides discipline for monetary policy decision-making, and serves as an anchor for private-sector inflation expectations. A low and stable rate of inflation is desirable both for the health of the economy and for individual welfare.
Why this progress indicator?
The relative price of goods and services (expressed by the CPI) tells us about stability as part of the aspiration for economic stability.
The CPI is considered a good measure of progress for economic stability because it measures the general rate at which prices change. The CPI has been designed as a general measure of price inflation faced by households. Inflation - an upward movement in the general level of prices - can impose costs on individuals and the economy. Over time, inflation reduces the purchasing power of money and can lead to market inefficiencies. Inflation is an important aspect of progress as it affects economic stability. Large or unanticipated changes in prices can distort the behaviour of consumers and businesses, who may find it more difficult to predict the effects of their saving and investment decisions. Inflation can also put upward pressure on wages as people struggle to meet rising costs, and can reduce trade competitiveness as prices of exports increase. This is why a stable rate for the CPI is a sign of progress as part of the aspiration for economic stability.
Although the CPI is the most comprehensive measure of inflation available, it does have certain limitations. The CPI is designed to measure inflation for Australian metropolitan households and thus may not accurately reflect the experience of people living in rural areas. Also, the CPI cannot be used to measure differences in price levels between one place and another; it only measures changes in prices over time. The CPI uses a fixed basket of goods and services which does not take into account people's substitution to relatively cheaper goods and services which is part of a cost–of–living index.
This indicator is a partial measure of economic stability.
The data source is of high quality.
Let's break it down!
The CPI has been more stable over the last decade than any of the five preceding decades. From the mid-1950s to the late 1960s, the annual rate of inflation in Australia remained relatively low (below 5 %) until a sharp rise in the first half of the 1970s (peaking at 17.2% in 1974). This was influenced by higher oil prices, wage growth and other factors. These inflationary pressures persisted into the 1980s, partly due to a second oil price shock, and although it continued to grow strongly, inflation was fairly stable during the 1980s (EPAC 1990). Between 2002 and 2012, growth in the CPI has been much more stable at an average annual rate of 2.8% over the decade.
Across all Australian capital cities over the last decade the CPI has increased by similar amounts. The greatest change was registered in Perth with an increase of 34.1%. The smallest change occurred in Hobart with an increase of 29.6%. However, the CPI is constructed specifically to measure changes in prices over time, and therefore it is not appropriate to use the CPI to compare price levels across two separate cities.
Use the drop down menu on the graph to look at other breakdowns of the indicator (graphs are also available on the further info page).
But that is not the whole story...
There is more to a resilient economy than economic stability. Look through the other tabs on this page to see if the other elements of a resilient economy have progressed.
Check out our further info page for useful links, a glossary and references relating to this chapter.
Prudent financial management in Australia has progressed over the last decade
Indicator: Total capital base ratio
Why is this element important?
Australians told us that prudent financial management of Australia's economy was important for national progress. In response to recent global economic downturns and natural disasters, many aspired to an economy that was able to cope with unexpected crises and maintain a good standard of living for Australians. The ability of the economy to respond and rebound was believed to be partially represented by the soundness of the financial sector. A prudent financial sector was able to withstand shocks to the economy even during significant downturns in the business cycle.
We have decided that the prudent financial management of Australia's economy has progressed over the last decade because the total capital base ratio (our progress indicator for prudent financial sector) has increased.
The total capital base ratio represent a bank's 'ability to withstand losses without becoming insolvent' (RBA 2010). Between 2002 and 2012, the total capital base ratio rose from 10.3% in 2001-02 to 11.8% in 2011-12. This ratio is well beyond minimum standards agreed upon internationally, which are currently set at 8% and will transition to 10.5% by 2019. This shows that Australia's banking sector is well ahead globally where prudence is concerned.
The increase in the total capital base ratio has been due to significant increases in the level and quality of capital held by the Australian banking sector in response to pressures following the recent global economic downturn. The recent rise in the proportion of the banking sector’s capital was mostly caused by a large amount of new equity issued in late 2008 and mid 2009. Added to this, risk-weighted assets of banks have seen limited increases, due to changes in the composition and growth of banks' loan portfolios.
These capital ratio increases are similar in size to those which took place in the early 1990s when Australia experienced a recession and strong market pressures compelled banks to improve their capital position.
Why this progress indicator?
The amount of money banks keep in reserve tells us about how prudent the financial sector is as part of the aspiration for a resilient economy.
The total capital base ratio is considered a good measure of progress for a prudent financial sector because bank failures can be highly disruptive to the economy. National regulators therefore promote resilience in the banking sector by specifying a minimum amount of capital that banks must hold and the form that capital should take in relation to their likelihood of incurring losses. The likelihood of loss is measured by quantifying a bank's credit, market and operational risks, giving rise to a metric called 'risk-weighted assets'.
Australia is committed to international agreements for prudential standards in banking. To help meet this commitment, the Australian Prudential Regulation Authority (APRA) currently requires all locally incorporated banks to hold total capital of at least 8 per cent of their risk-weighted assets. This requirement is gradually transitioning to 10.5 per cent by 2019.
This indicator is a partial measure of prudent financial sector.
The data source is of high quality.
But that is not the whole story...
There is more to a resilient economy than a prudent financial sector. Look through the other tabs on this page to see if the other elements of a resilient economy have progressed.
Check out our further info page for useful links, a glossary and references relating to this chapter.
A data gap currently exists for information about the economy
In MAP there are several types of data gaps where:
1. the concept is not yet developed enough to measure;
2. the concept is important for progress but may not lend itself to meaningful measurement;
3. there is no data of sufficient quality to inform on progress; or
4. there is only one data point, so a progress assessment cannot be made.
A range of possible indicators have been considered for measuring whether information about the economy is progressing, but no suitable measure has currently been identified. Information is a critical element in a modern society as the economy, society and governments require accurate information upon which to make decisions. The information may be formal in nature, for example academic papers, news items, statistical publications, or informal. It may be transmitted by various media and by personal interactions. The information flows are continuous, diverse in subject matter, high volume and of variable quality. The challenge is to determine an indicator that reflects how well served society is by its economic information system. Not surprisingly, there are a large number of measures specific to types of formally organised and transmitted information flows, but very little that might adequately summarise the volume, diversity and quality of information, let alone form a view on whether the information system is improving. Basic research into an information system measurement framework is required before being able to evaluate existing partial indicators. Despite the importance of information, we are unaware of any research towards such a framework, nor plans to undertake such work.
But that is not the whole story...
There is more to a resilient economy than information about the economy. Look through the other tabs on this page to see if the other elements of a resilient economy have progressed.
Check out our further info page for useful links, a glossary and references relating to this chapter.
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