SECTION A Read the following edited version of the opening statement to the Economics Legislation Committee, Parliament House, Canberra by Dr Steven Kennedy, Secretary to the Treasury- April 2022. The Australian economy has proved itself resilient to the ongoing effects of the pandemic and other shocks. Throughout each successive wave, the recovery has been stronger than expected and Australians have adapted quickly to living with COVID-19. Australia has avoided the labour market scarring feared early in the pandemic. In February, the unemployment rate was at 4 per cent, and the participation rate at a record high of 66.4 per cent,,.. Two new shocks and sources of uncertainty have arisen - the floods and Russia's invasion of Ukraine.... The direct economic cost of the floods is expected to generate a drag on real GDP growth of around 12 a percentage point in the March quarter. The impact will be felt through reduced activity in the local agriculture, mining, retail trade, accommodation and food services, and construction industries. Trade will be affected, with coal exports to be relatively subdued in the quarter.... Local agricultural businesses have experienced loss of livestock but at the aggregate level exports are unlikely to be significantly affected. Over coming years, the direct and immediate costs will be partially offset by increased investment to replace and rebuild damaged housing, infrastructure, inventories and household goods. The additional demand may place further upward pressure on the supply of materials and labour in the construction industry. Russia's invasion of Ukraine and the spill-over effects are creating significant headwinds for the global recovery. The invasion is having devastating social and economic impacts in Ukraine and sanctions are causing a sharp economic contraction in Russia. For other countries, the risks include sharply higher energy and agricultural prices, further strains on global supply chains and impacts on confidence. At this stage, global growth is expected to be around % of a percentage point lower in 2022 - and global inflation around 1/2 percentage points higher - primarily through higher oil, gas and wheat prices. The full effect will depend on the duration and severity of the conflict and the extent of energy, commodity and trade disruptions. Australia is better placed than many countries to absorb these impacts. Being a net energy and commodities exporter and having little direct trade with Russia, Australia will benefit from higher export earnings. However, higher fuel and other prices will negatively affect household confidence and consumption, and lead to higher inflation. Economic outlookEconomic outlook Real GDP is forecast to grow at 414 per cent in 2021-22. ...As pandemic-related support continues to taper, private sector activity is expected to become the main driver of growth. Real GDP growth is forecast to grow by 312 per cent in 2022-23 and 212 per cent in 2023-24. The unemployment rate is forecast to fall to 3%% per cent in the second half of 2022. Strong household balance sheets, low unemployment and increasing wages growth put households in a strong position to increase consumption away from goods and back toward services. Investment will be supported by strong business balance sheets, temporary business tax incentives and increasing capacity utilisation. Record prices for bulk commodities will also boost incomes and support growth in the near term. Risks to the outlook If a new more virulent variant emerges so that absenteeism reaches levels similar to the peak in January 2022, annual GDP growth could be 1/2 percentage point lower than forecast, and unemployment /4 percentage point higher. Econ 1007 Macroeconomics SP 2 2022 2 Economic activity in China could well be more affected by the pandemic in 2022 than it was in 2021 as China has not yet transitioned to living with the virus. The potential for an extended conflict in the Ukraine is a second downside risk for the global economy. Russia is an important global commodity supplier, producing 18 per cent of the world's gas and 12 per cent of world's oil. Russia and Ukraine together supply almost 25 per cent of the world's wheat. The invasion has increased the risk of supply disruptions, pushing up and increasing volatility in energy, agricultural and metals prices. While Australia [may] weather these disruptions, other economies with greater reliance on energy and food imports will experience greater economic impacts. A prolonged conflict will increase the risks associated with the negative terms of trade and confidence shocks for these countries. Inflation outlookInflation outlook Current events are expected to exacerbate existing supply chain difficulties and drive a further increase in the already-high levels of global inflation. Currently, inflation stands at 7.9 per cent in the US and 6.2 per cent in the UK... In Australia, inflation pressures have also picked up,...and... our central forecast is for inflation to pick up to 4% per cent through the year in the March and June quarters. Our forecasts assume oil prices will reduce from the recent peak of above $125 per barrel but remain elevated throughout the forecast period. A more prolonged period of higher oil prices could add a further % percentage point to annual inflation in mid-2022. The assumed fall in oil prices and an easing of supply chain pressures is expected to steadily reduce global inflationary pressures. However, the tight domestic labour market and strengthening of wages growth will see headline inflation remain at the upper end of the Reserve Bank's target band for some time, 2%% per cent to June 2024 and to June 2025. At Budget, Treasury reduced our assumption of the NAIRU (the level of unemployment below which inflation would be expected to accelerate) to 4% per cent from 4% per cent. Treasury has taken this stance as spare capacity has reduced more rapidly than expected, while wage growth has increased more slowly than is consistent with the NAIRU being 4%% per cent. ... The observed strength in employment means that more people in the labour force have gained and retained skills that increase their employability, favouring a lower estimate of the NAIRU. The stronger and more uncertain outlook for global inflation is raising the risk that inflation expectations in major countries may drift up, making it more difficult for central banks in containing inflation without a policy-induced "hard landing". An orderly normalisation of both fiscal and monetary policy settings to support sustained low unemployment and stable inflation will be a key challenge for policy makers over coming years.Question 2. Starting from an equilibrium position when the economy is near full employment, discuss the immediate economic consequences that result because of the floods in eastern Australia. Use a static AD/AS model to illustrate your discussion. Total marks for Question 2 = 10 marks Tip: Given the number of people and businesses involved, you should assume the floods ' impact extends to the entire economy. Be sure to link your assumptions about what happened to your discussion and then how this is reflected in your diagram. Most marks in this question are allocated to the written part of your answer. Caution - under NO circumstances cut and paste your diagram from another source. Question 3. Dr Kennedy states that "Over coming years, the direct and immediate costs will be partially offset by increased investment to replace and rebuild damaged housing, infrastructure, inventories and household goods. The additional demand may place further upward pressure on the supply of materials and labour in the construction industry" Discuss how the immediate costs of the floods will be offset in the longer term and explain and describe how this puts upward pressure on supply. You should again use the static AD/AS model to illustrate your discussion. Total marks for Question 3 = 10 marks Tip: Again, assume nationwide effects and be sure to link your assumptions to your discussion and then how this is reflected in your diagram. Most marks in this question are allocated to the written part of your