Economy of Australia: Analysis of Macroeconomic Indicators and Future Issues

The paper aims to study the economy of Australia by analysing the performance of the economy in different macroeconomic indicators. The paper uses the secondary data collected from the websites and government portals. The paper has found out that, in most of the economic indicator the performance of the Australian economy is not up to the mark and hence some issues can be faced by the economy in the coming months.

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ASSIGNMENT OF ECONOMICS
AUSTRALIA

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Executive summary
The paper aims to study the economy of Australia by analysing the performance of the
economy in different macroeconomic indicators. The paper uses the secondary data collected
from the websites and government portals. The paper has found out that, in most of the
economic indicator the performance of the Australian economy is not up to the mark and
hence some issues can be faced by the economy in the coming months.

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Contents
1.0 Introduction..........................................................................................................................4
2.0 Analysis................................................................................................................................4
2.1The economic indicators and the state of the Australian economy.......................................4
2.1.1 GDP growth rate...............................................................................................................4
2.1.2 Unemployment rate...........................................................................................................5
2.1.3 Inflation rate......................................................................................................................6
2.1.4 Terms of trade...................................................................................................................6
2.1.5 Current account.................................................................................................................7
2.1.6 Net Foreign Debt...............................................................................................................8
2.1.7 The exchange rate of Australian Dollar............................................................................9
2.2 Three issues facing the economy in the next 12 months....................................................10
3.0 Conclusion..........................................................................................................................11
Reference..................................................................................................................................12

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1.0 Introduction
The Australian economy is one of the largest mixed economies of the world with GDP
amounting to 1.69 Trillion USD. Another important feature of the Australian economy is the
per capita wealth which puts this country in the second spot in the list. However, due to
global events such as the trade war between China and the USA, the economy of Australia
has been showing signs of a downturn. Economists are concerned about the future of the
economy and looking for ways to deal with the problem. The objective of the paper is to
study different macroeconomic indicators related to Australia. This study can be a useful
source of information for economists and the government for undertaking new policies for
the betterment of the economy.
2.0 Analysis
2.1The economic indicators and the state of the Australian economy
2.1.1 GDP growth rate
The government and the central bank of Australia had set a goal to maintain an economic
growth rate of 3% since the year 2015. Compared to the state of the economy in the last 5
years, the economy of Australia is currently under pressure due to the poor performance in
the GDP growth rate indicator. The figure below furnishes the GDP growth rate of the
Australian economy.
Figure 1: The GDP growth rate of Australia
2015 2016 2017 2018 2019 Aug-19
2.3360754810
9675
2.8467549510
8566 2.3425822867
6258
2.8349481329
6823
0.2803546
0.8035658
Australia's GDP growth rate
Annual GDP growth rate

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(Source: Tradingeconomics.com, 2019)
The values of the indicator before the year 2019 were greater than the latest value of the
indicator. The current growth rate of 0.8% is way below the target of the government and
hence can stretch the time taken to grow the economy to a 2 Trillion USD GDP. There has
been a sharp fall in the GDP growth rate from 2018 to 2019, owing to the tensed relationship
between China and the USA. China is one of the biggest trade partners of Australia, and
hence economic downturn in China has caused the GDP growth to fall (Wilson et al. 2018).
2.1.2 Unemployment rate
Being one of the largest economies of the world, the unemployment rate had never been a
concern for the government. With the increase in the interest rates, the investment inflow into
the market of Australia has increased leading to the creation of a huge pool of works for the
citizens of Australia.
2015 2016 2017 2018 2019 Aug-19
6.0542001724243
3
5.7098999023437
6 5.5911998748779
3 5.5988
5.1254
5.3951
Unemployment rate
Unemployment rate
Figure 2: The annual unemployment rate of Australia
(Source: Tradingeconomics.com, 2019)
The unemployment rate has been better than in the previous years as can be seen from the
above figure. There is a slight increase in the unemployment rate since the start of the year
2019 (Treasury.gov.au, 2019). However, the government can deal with this unprecedented
increase in the unemployment rate with the increase in infrastructure development. The trend
of the unemployment rate of Australia’s economy is in line with the target set by the labour

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department of the country. In recent years, the economy of Australia has responded more to
government policies than before.
2.1.3 Inflation rate
The economy of Australia is currently trying to increase the investment inflow into the
economy through the increase in the interest rates. However, the inflation rate of the country
can negatively impact the volume of investment that flows into the economy of Australia
annually. The inflation in the current times has been performing similarly as it had been a few
years back. Therefore it is a commendable job done by the central bank of Australia and the
government in keeping the price level low.
2015 2016 2017 2018 2019 Aug-19
1.5083667216
5921 1.2769909449
7328
1.9486474094
4522 1.9114009444
5692 1.903548 1.712546
Inflation rate of australia
Inflation rate of australia
Figure 3: The inflation rate of Australia
(Source: Tradingeconomics.com, 2019)
The inflation rate of the economy as per the data of august 2019 is more than that of 2015.
That means the economy of Australia has been in the boom phase of the business cycle for a
long time. However, the most noticeable thing from the above figure is the slight reduction of
inflation from the start of the year to august of 2019. Henderson (2015) stated that the fall in
the level of inflation can sometimes be the signal for an upcoming economic recession.
2.1.4 Terms of trade
The current terms of trade of the Australian economy are 102.4. This is an improvement from
what it was since 2015 (Wto.org, 2019). The economy of Australia had experienced a huge
surge in demand for goods and services in the Asian market. In addition to that, the mining

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boom that happened recently in Australia allowed it to produce minerals at a cheaper cost
leading to an increase in demand for the goods and services exported from Australia.
2015 2016 2017 2018 2019 43678
82.1
71.7
87 87.4 93.6 102.4
terms of trade
terms of trade
Figure 4: The terms of trade in Australia
(Source: Tradingeconomics.com, 2019)
Therefore, compared to the performance of the economy from 2015 to 2019, the current
performance of the economy in terms of TOT is better. The credit for the achievement of this
sector can be given to the government for their export promotion policies. According to
Pc.gov.au (2019), by the year 2020, the government wants to reduce the current account
deficit by increasing the export volume in the global market.
2.1.5 Current account
The current account indicator of the Australian economy shows that, in terms of trade, the
economy is doing better than ever. From 2015 to 2019, the current account deficit has
reduced significantly contributing to the foreign exchange reserves of the country (Oecd.org,
2019). Following the same path, the current account deficit is approaching the target of a
trade surplus.

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2015 2016 2017 2018 2019 Aug-19
-
57363139436.38
58
-
41196621625.92
98
-
35698208946.54
13
-
29062354066.84
37
-23254565452 -18652545652
Curent account
Curent account
Figure 5: The current account of Australia
(Source: Tradingeconomics.com, 2019)
The figure shows an upward sloping curve showing the reduction in the trade deficit. This
reduction in the current account deficit can help reduce the debt burden of the economy in the
future. Apart from, the lowering differences between the import and the export also have the
potential to strengthen the value of the Australian currency.
2.1.6 Net Foreign Debt
It can be said that in terms of Net Foreign Debt, the country has not been doing good
compared to 2015-2019. As per the data of August 2019, the net foreign debt of the
Australian economy is 1689839 million US Dollars which is a lot compared to that of 2016
(Hellwig and McAllister, 2016). The country has no clear direction and plan regarding the
Net foreign deb. adding to that, the devaluation of the Australian currency is making it worse
for the Australian economy at the moment.

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2015 2016 2017 2018 2019 43678
1630967
1521458
1646000
1600782
1729658
1689839
Net foreign debt (US mn dollar)
Net foreign debt (US mn dollar)
Figure 6: The net foreign debt of Australia over the years
(Source: Tradingeconomics.com, 2019)
From the trend that can be seen from the above figure, it is following the peaks and troughs
of the business cycle (Finance.gov.au, 2019). Hence it is expected that the foreign debt can
further increase in the next period. Compared to 2015-2019, the economy has not been doing
good or in good condition in terms of the Net foreign debt.
2.1.7 The exchange rate of the Australian Dollar
In 2015, the Australian dollar was so powerful that it was almost same as the US dollar.
However, the demand for Australian currency has redirected over the years coming to a point
where the value is 0.68 USD. The economy has experienced a different performance level in
different years.

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2015 2016 2017 2018 2019 43678
0.820840000000
001
0.697040000000
001
0.719970000000
001
0.78633
0.704190000000
001 0.685750000000
001
value of australian dollar (in USD)
value of australian dollar (in USD)
Figure 7: the value of the Australian dollar in USD
(Source: Tradingeconomics.com, 2019)
In 2015 and 2018 the economy has been able to appreciate the value of the Australian dollar.
Other than that, it has failed to put extra pressure on the government which has a huge foreign
debt that needs to be paid using US dollars (Morgan et al. 2016). There seems to be no clear
plan from the side of the government to appreciate the currency to its targeted level. This
kind of fluctuations in the exchange rate can be daunting for the ongoing investment inflow
policy of the government as well.
2.2 Three issues facing the economy in the next 12 months
As stated above, the study of the macroeconomic indicators allows the reader to find out the
state of the economy and any upcoming troubles. Therefore based on the data, it can be said
that the economy of Australia can face a reduction in the investment inflow in the coming
months owing to the fluctuations in the exchange rate (Finance.gov.au, 2019). The investors
of the market can go into the speculation of low-interest rates given the current situation that
would further reduce the likeliness of the investment. The figure below shows the
relationship between the exchange rate and the FDI inflow for the period before 2015.
Therefore, historically, a devaluation of the Australian dollar has caused a similar reduction
in the FDI inflow that can also happen in this case as well.

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Figure 8: Relationship between exchange rate and FDI
(Source: ABC News, 2019)
Apart from that, another problem that can bother the government of Australia is the economic
slowdown. The inflation of the economy is reducing that can reduce the per capita income of
the sellers of the market (Chubb and Watermeyer, 2017). This will, in turn, reduce the
disposable income and hence the aggregate demand for goods and services in the market.
The third issue that can be faced by the economy of Australia is the lack of demand for credit
creation in the market (O'Neill and Chapman, 2015). Credit creation is important for the
economy to grow, however with the low aggregate demand; the borrowers of the economy
can postpone the consumption leading to a lack of demand for credit.
3.0 Conclusion
Therefore to conclude, the economy of Australia is not performing better compared to 2015-
19. Although in some of the indicators, it has done well, there are signs of the recession that
the government needs to take care of. The striking finding of this paper is the devaluation of
the currency along with a rise in the net foreign debt. This can not only increase the tax
burden of the government but also reduce the availability of capital for infrastructure
development. Thus, currently, the economy of Australia is in a problematic situation
compared to a few years ago.

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