The Australian Economy: A Comprehensive Analysis

This assignment delves into a comprehensive analysis of the Australian economy, examining its historical performance, current state, and future prospects. It incorporates various economic indicators like GDP growth, inflation, interest rates, and trade balance to evaluate the country's economic health. Additionally, it explores the impact of monetary and fiscal policies on the Australian economy and discusses key challenges and opportunities facing the nation. The analysis draws upon data from reputable sources such as the International Monetary Fund, Reserve Bank of Australia, and OECD.

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A Comparative Analysis of the Australian and US Economy between
1985 - 2016
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Com

Contents
1. Introduction.........................................................................................................................................2
2. Real GDP Growth Rates: A Comparison...............................................................................................2
3. The Role of Exchange Rates.................................................................................................................6
4. The Role of Trade Balance or Net Exports...........................................................................................8
5. The Role of Interest Rates.................................................................................................................11
6. Conclusion.........................................................................................................................................14
Bibliography...............................................................................................................................................15

Executive Summary
Australia and the United States have seen tremendous growth since the year 1991. The Australian
growth for a period of nearly a decade beginning in the early 1990s is generally known as an economic
miracle. The two countries enjoyed similar growth rates and similar growth paths in during the decade
from 1991-2000. This led many to believe that there are linkages between the real economy of the USA
and the Australian economy and explore the linkages between the two economies. While the two
countries seem to have similar track records, it could be purely circumstantial. The following paper
analyses the data on various macro-economic parameters such as Real GDP Growth Rate, Real Effective
Exchange Rate, Interest Rates and Net Exports growth between the two countries.

Introduction
Australia and the United States have seen tremendous growth since the year 1991. The country
followed very similar trajectories of economic growth since the year 1985 for nearly up to a decade. This
has led to the belief that the Australian economy is greatly affected by movements in other economies.
However, Bean (2000) argues that this was a period of prosperity for most advanced countries including
other countries like Japan. The economies of the two countries are linked due to trade and globalization
but the two countries have differences too. These include differences in population size , geographical
positions and more

2. Real GDP Growth Rates: A Comparison
Table 1Table 1 A Comparison between the Real GDP Growth Rates of Australia and USA. Source: (International Monetary
Fund, 2017)

Year Real GDP Growth Rate
USA
Real GDP Growth Rate
Australia
1985 4.2 5.5
1986 3.5 2.4
1987 3.5 4.9
1988 4.2 4.3
1989 3.7 4.6
1990 1.9 1.5
1991 -0.1 -1
1992 3.6 2.7
1993 2.7 4
1994 4 4.9
1995 2.7 2.9
1996 3.8 4.3
1997 4.5 4.3
1998 4.4 4.7
1999 4.7 4.3
2000 4.1 3.2
2001 1 2.5
2002 1.8 4
2003 2.8 3
2004 3.8 4.1
2005 3.3 3.2
2006 2.7 2.7
2007 1.8 4.5
2008 -0.3 2.6
2009 -2.8 1.7
2010 2.5 2.3
2011 1.6 2.7
2012 2.2 3.6
2013 1.7 2.1

Graph 1 A Comparison between the Real GDP Growth Rates of Australia and USA. Source: (International Monetary Fund,
2017)
As seen from the above graph, there is definitely a co-relation between the trajectories of the
growth rates. During the Asian Crisis of 1997, the Australian and the US economy grew further
despite the odds of lower demand from Asia. However, the US economy growth seems to have
hit rock bottom during the financial crisis but recovered as sharply as it fell, showing a higher
growth rate than the USA and then again in 2014.. In the economic Survey of 2016, the
Organization for Economic Co-operation and Development, (2017) commended the USA for
achieving better GDP growth than most countries in the OECD, including Australia. The year
2007, there was sub-prime housing crisis in the USA which then morphed into a global financial
crisis. (Demyanyk & Hemert, 2009)
Recovering from a recession in the 1991, both countries have shown a growth remarkable
growth between 1992-2000. Some of the reasons that led to a period of sustained growth in
Australia are the deregulation of the financial sector, the removal of barriers on trade and floating
the currency in the free market (Harchaoui, Jean, & Tarkhani, 2006). At the same time, the USA
with its neo-liberal trade policies, fiscal and monetary policies of allowing smaller budget
deficits and progressive taxation, also underwent periods of economic boom. (Kotz, 2003)
(Jeffery Frankel, 2001) This was a period of high private sector investment and high consumer
spending in USA. (Jeffery Frankel, 2001) During this period, asset prices in advanced
economies were beginning to bubble. (Bean, 2000) This helps establish that are linkages between
the various economies of the world.
Following the period of sustained growth, there is a sudden sharp dip in the year 2008. The
Financial Crisis of 2008-2009 was one of the biggest economic crises that the world has
experience since the Second World War. (Bean, 2000) The economy of USA took a serious hit
and went into a recession with a Real GDP growth rate of -3% but the Australian economy did
not take such a sharp dip.
The US economy also seems to have been more volatile following the crisis, than the Australian
economy. According to Organization for Economic Co-operation and Development, (2017), the
US economy still seems to be reeling from the after-effects of the financial crisis despite a
sustained growth for the seven years following the crisis.

The graph above shows that co-relation between the US economy and the Australian economy
starts to weaken during the crisis as the Real GDP growth rate is largely better than the real US
growth rate at the tail end i.e. in the post financial crisis period.
In the post- crisis period, the US economy has expanded, although this expansion is nothing like
the previous economic expansions that the country has seen, such as the economic boom of
1990s.
According to Organization for Economic Co-operation and Development, (2017), the US
economy has surpassed the peak –crisis output levels which would indicate its recovery.
According to the OECD, the recovery has been largely due to profit margins in the private sector
of the economy, especially the technology sector. On the other hand, the commodity boom has
been responsible for the buoyant Australian economy between 2012 and 2016. Both the countries
have also has fiscal policies of allowing greater budget deficit and this seems to have off for the
two countries.
1. The Role of Exchange Rates
In this case, we have taken the Real Effective Exchange Rates (REER) to measure the macro-
economic performance since REER accounts for inflation and is largely free from distortions of
currency market speculation.
“REER is the nominal effective exchange rate (a measure of the value of a currency against a
weighted average of several foreign currencies) divided by a price deflator or index of costs.”
(International Monetary Fund, 2017) Exchange rates are related to terms of trade since a better
exchange rate implies better relative prices. “Growth in REER implies that exports became more
expensive while it became cheaper to import goods. This is an indicator of the loss in ‘trade
competitiveness’ (International Monetary Fund, 2017) The graph shown below depicts that the
Australia REER followed more or less the trajectory of the USA REER, until 1995. Following
that during period of 2000 - 2005, the Australian trade competiveness has grown comparatively
with a sharp dips in the REER. This implies that Australia outperformed USA in competitiveness
during this period. However, between 2010 and 2016, the Australia REER was greater than that

of USA. This implies a sharp dip in the competitiveness which goes hand in hand with the GDP
growth.
The co-relation between REER and trade balances is not one sided. It has been observed that
REER in Australia, is significantly influenced by the terms of trade, thereby confirming that the
volume of trade has a significant impact on exchange rates.
(Tarditi, 1996)
Table 2: Real Effective Exchange Rates Source: ( The World Bank, 2017)
Year Australia United
States
1985 85.4 149.0
1986 74.7 125.2
1987 74.5 112.7
1988 82.1 106.2
1989 88.0 109.6
1990 85.7 104.5
1991 84.4 103.2
1992 76.3 100.7
1993 71.1 103.7
1994 74.6 103.1
1995 72.9 99.7
1996 79.8 102.7
1997 79.3 107.7
1998 72.6 115.3
1999 72.9 114.3
2000 69.7 117.9
2001 66.9 124.6
2002 70.1 124.3
2003 78.5 116.4
2004 84.5 110.9
2005 87.1 109.4
2006 86.3 108.7

2007 91.3 103.6
2008 89.8 99.5
2009 87.3 104.0
2010 107.1 100.0
2011 109.8 95.1
2012 105.2 98.0
2013 100.1 99.1
2014 92.9 101.2
2015 92.9 113.8
2016 93.2 117.5
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
2015
0
20
40
60
80
100
120
140
160
REER Comparison
Australia
United States
Graph 2: REER Comparison for Australia and USA . Source ( The World Bank, 2017)
The graph shown above has similar movements to the Real GDP Growth Rate graph, indication a
direct relationship between REER and Real GDP Growth Rate.

2. The Role of Trade Balance or Net Exports
Australia is a country with large mineral resources and agricultural commodities and these are some of
the major exports of the country. The USA is the second largest importer of goods from Australia.
(Depratment of Foreign Affairs and Trade, Australian Government, 2017)
Table 3: Trade Balances or Net Exports of USA with Australia as a trading partner
Year Net Exports for
USA to Australia
(in Million Dollars
Exports Imports
1985 2,604.10 5,440.40 2,836.30
1986 2,923.40 5,551.10 2,627.70
1987 2,489.30 5,494.80 3,005.50
1988 3,431.50 6,972.90 3,541.40
1989 4,458.40 8,331.30 3,872.90
1990 4,091.10 8,537.70 4,446.60
1991 4,415.80 8,403.80 3,988.00
1992 5,188.30 8,875.90 3,687.60
1993 4,979.40 8,276.70 3,297.30
1994 6,578.50 9,780.60 3,202.10
1995 7,466.10 10,789.10 3,323.00
1996 8,139.50 12,008.40 3,868.90
1997 7,460.60 12,062.90 4,602.30
1998 6,530.50 11,917.50 5,387.00
1999 6,538.20 11,818.30 5,280.10
2000 6,044.40 12,482.40 6,438.00
2001 4,452.70 10,930.50 6,477.80
2002 6,606.10 13,084.90 6,478.80
2003 6,673.90 13,087.60 6,413.70
2004 6,412.40 13,957.90 7,545.50
2005 8,246.30 15,588.50 7,342.20
2006 9,341.70 17,545.70 8,204.00
2007 10,563.20 19,178.20 8,615.00
2008 11,629.80 22,218.60 10,588.80

2009 11,587.80 19,599.30 8,011.50
2010 13,221.70 21,804.60 8,582.90
2011 17,383.30 27,626.20 10,242.90
2012 21,594.60 31,161.40 9,566.80
2013 16,851.20 26,123.70 9,272.60
2014 15,984.40 26,681.70 10,697.30
2015 14,150.60 25,034.10 10,883.50
2016 12,649.80 22,159.70 9,509.90
In the table above, the net exports (exports- imports) also known as trade balance have surged
since 1985, implying that the growth rate of the net exports from USA to Australia has surged
continually with a single dip. Overall, Net exports for USA have remained positive throughout.
As seen in the table above, the exports from USA to Australia grew at a faster rate than the
imports from USA to Australia. This growth has been continuous with the only decline seen
during the four year period following the Asian crisis. A decline in the exports to Australia from
USA signifies lower demand. However, domestic demand surged during the same in Australia.
An excess of exports to imports affects the exchange rate of the country. This could also imply,
that the USA industries rely more on Australia than on the Australia markets rely on the USA.
Assuming that USA’s imports from Australia are the Australia’s exports to USA, we could draw
the following chart.

1985
1988
1991
1994
1997
2000
2003
2006
2009
2012
2015
0.00
5,000.00
10,000.00
15,000.00
20,000.00
25,000.00
30,000.00
35,000.00
Bilateral Exports
Exports from USA to Australia (in
Millions USD)
Exports fromAustralia to USA (in
Millions USD)
YearAxis Title
Graph 3: Bi-lateral trade between Australia and USA in 1985. (United States Census Bureau,
2017)

1985
1988
1991
1994
1997
2000
2003
2006
2009
2012
2015
0.00
5,000.00
10,000.00
15,000.00
20,000.00
25,000.00
Net Exports for USA to Australia (in Million
Dollars
Net Exports for USA to
Australia (in Million Dollars
Graph 4: Net Exports of USA from Australia (in millions USD). These figures reflect the
corresponding negative balance of trade for Australia (negative net Exports) (United States
Census Bureau, 2017)
3. The Role of Interest Rates
Given below, in the table, is a comparison of the short term interest rates. These are the annual
average interest rates (here represented by Cash rates for Australia and Federal Fund’ rate for
USA,) Interest rates are important tool in stabilizing the economy. (Sachs, 1989).
In the early 1990s, Federal banks for both countries lowered the interest rates, accompanied by
other reforms. For example, at the beginning of 1990, both the Cash Rate for Australia and
Federal Funds rate for USA were over 13.00. Thereupon, began a period of sustained lower
interest rates for both countries.
Good monetary policy has been the hallmark of Australia’s performance since the 1997 Asian
crises. (Harchaoui, Jean, & Tarkhani, 2006). The Reserve Bank of Australia lowered the cash
rate as soon as the Asian crisis struck which fuelled domestic demand. During the crisis, the
Australian Dollar fell nearly 20% against the US Dollar, yet this did not seem to affect the

Australian economy. (Bean, 2000) A fall in exchange rate of AUD would imply cheaper exports
for Australia. This could explain the growth in exports to the USA and reduction in imports. A
period of better trade balance and a growth in domestic demand following the period of Asian
crisis may have been the reason for the GDP growth in Australian economy despite the Asian
crisis.
Similarly, during the financial crisis of 2008, aggregate demand dropped drastically. Central
Banks all over the world had to drop interest rates to fuel demand and some Central Banks were
not averse to zero percent interest rates. (Blanchard, Dell'Arricia, & Mauro, 2010) (McDonald &
Morling, 2011) This is reflected in the chart and table below.
Table 4 The Lending Rates of Reserve Bank of Australia and Federal Reserve Bank. Source: (Organization For Economic Co-
operation and Development, 2017)
Year Australia United States
i
1984 .. 8.38
1985 8.27
1986 .. 6.91
1987 .. 6.77
1988 .. 8.76
1989 .. 8.45
1990 12.58 7.31
1991 8.50 4.43
1992 5.75 2.92
1993 4.75 2.96
1994 7.05 5.45
1995 7.50 5.60
1996 6.18 5.29
1997 5.00 5.50
1998 4.76 4.68
1999 5.00 5.30

2000 6.25 6.40
2001 4.28 1.82
2002 4.75 1.24
2003 5.23 0.98
2004 5.25 2.16
2005 5.50 4.16
2006 6.25 5.24
2007 6.75 4.24
2008 4.35 0.16
2009 3.74 0.12
2010 4.75 0.18
2011 4.30 0.07
2012 3.03 0.16
2013 2.50 0.09
2014 2.50 0.12
2015 2.00 0.24
2016 1.50 0.54
The period of low interest rates trend has continued. The post-crisis low interest rest have led to
greater mortgage borrowing in Australia, which could partially explain the expansion of
Australia’s economy during this period. (Organization for Economic Co-operation and
Development, 2017) The interest rates in the US compared to Australia is even lower and near to
zero, although it started to move upward. This implies that there are some fundamental
differences between the two economies.
Interest rates could also been seen as an indicator of economic strength. Long Term Bond Yields.
According to Gruen & Shrestha (2000), the increase in Australia’s competitiveness could be
gauged from the fact long term bond yields for Australia reached the level of yields of German
and American bonds, implying a trust of investors in the bonds.

1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
0.00
2.00
4.00
6.00
8.00
10.00
12.00
14.00
Australia
United States
Graph 5 A Comparison Between Bank Lending Rates Between Asutralia and USA
4. Conclusion
There is plenty of evidence to suggest that ups and downs in the Australian economy are co-
related to ups and downs in the US economy. Foreign economic developments since 1998 have
been noted to have a contractionary policy on the Australian markets, the USA in particular. This
could simply be a result of the globalization of the Australian economy and banking system.
Advanced economies, generally, have a greater demand for Australian manufactured goods than
the developing countries. (Organization for Economic Co-operation and Development, 2017). It
is, therefore, easy to conclude that the changes in the real economy seem to have an effect on the
Australian economy
Gruen & Shuetrim, (1994) proved the existence of a long term equilibrium relationship
between the Gross Domestic Products of Australia and USA. However, this analysis was from
before the 1997 sub prime crisis, following which Australia seems to have taken its own path.
This, however, does not imply that there are no linkages between the economic performances of
the two economies.
There is a strong link between the real economy of the USA and Australia is due to trade and
globalization of Australian financial and banking system since 1985. These reforms that took
Australia towards a more globalised system, essential have ensured that there are no limits on the
number of subsidiaries or branches that any bank could establish in the country. (Bean, 2000)

Even though banks and financial institutions are more of monetary entities, it is possible that
problems in the banking system could set of a “real” crisis. The Australian economy has very
strong global linkages and hence, the most powerful risk to the economy is from the global
contagion, spillover effects of increases in global asset market prices credit growth, especially
those in the USA. (Organization for Economic Co-operation and Development, 2017)
Bibliography
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https://data.worldbank.org/topic
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Australia.
Blanchard, O., Dell'Arricia, G., & Mauro, P. (2010). Rethinking Macroeconomic Policy. Journal of Money,
Credit and Banking , 199-215.
Demyanyk, Y., & Hemert, O. V. (2009). Understanding the Subprime Mortgage Crisis. The Review of
Financial Studies , 1848–1880,.
Depratment of Foreign Affairs and Trade, Australian Government. (2017, Februaru 17). Asutralia's Trade
in Goods and Services. Retrieved September 7, 2017, from Australian Government, Department of
Foreign Affairs and Trade: www.dfat.au/about-us/publiccations/trade-and-investment
Gruen, D., & Shrestha, S. (2000). The Australian Economy in the 1990s. Melboutne: Reserve Bank of
Australia.
Gruen, D., & Shuetrim, G. ((1994). Internationalisation and the Macroeconomy. International Integration
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Harchaoui, T. M., Jean, J., & Tarkhani, F. (2006). Comparisons of economic performance:Canada versus
Australia, 1983–2000. Monthly Labor Review , 36-47.
Henry, Ó. T., & Summers, P. M. (1999). Australian Economic Growth: Non-linearities and International
Influences. Econometric Society. Melbourne.
Horridge, M., Madden, J., & Wittwer, G. (2005). The impact of the 2002–2003 drought on Australia.
Journal of Policy Modeling , 285-308.
International Monetary Fund. (2017). REER is the nominal effective exchange rate (a measure of the
value of a currency against a weighted average of several foreign currencies) divided by a price deflator
or index of costs. Retrieved September 6, 2017, from International Monetary Fund:
http://datahelp.imf.org/knowledgebase/articles/537472-what-is-real-effective-exchange-rate-reer