This paper analyzes the macroeconomic performance of Australia from 1990 to 2016, including real GDP growth, inflation, cash rate, export, import, and unemployment rate. It also evaluates the interrelationship between these indicators and the impact of government policies on the economy.
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Running Head: MACROECONOMIC PERFORMANCE OF AUSTRALIA Macroeconomic Performance of Australia Name of the Student Name of the University Author note
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1MACROECONOMIC PERFORMANCE OF AUSTRALIA Executive Summary The paper visited Australian economic performance for period ranging from 1990 to 2016. The main performance indicators considered here include real GDP growth, inflation., cash rate, export, import, and unemployment rate. The analysis also involves pairwise evaluation of GDP growth, inflation and unemployment to look into interrelationship between these indicative measures. GDP growth through expansion of employment reduces unemployment. Inflation is recorded to be highly volatile during the decade of 1990s. Price level gradually stabilized thereafter. A positive association has found between exchange rate between USA and Australia and that of net export. The paper finally incorporates simultaneous movement of cash rate and fund rate to find whether any association exists between the two. Data though find a strong positive association between cash rate and fund rate but it is more of the status of domestic economy that influence cash rate decision.
2MACROECONOMIC PERFORMANCE OF AUSTRALIA Table of Contents Introduction.................................................................................................................................................3 Real GDP growth, inflation and unemployment..........................................................................................3 Growth history and Business cycle..............................................................................................................5 Trade and exchange rate.............................................................................................................................6 Cash rate, fund rate and policy implication.................................................................................................8 Australian economic outlook.....................................................................................................................10 Conclusion.................................................................................................................................................10 References list...........................................................................................................................................11
3MACROECONOMIC PERFORMANCE OF AUSTRALIA Introduction Analysis of economic performance requires evaluation in several dimension. Long term growth of a is represented by the trend growth in real GDP. The economic growth is again related with unemployment and price level movement. Evaluation of external account involves analysis of net export and exchange rate. Strong interdependence exists between volume of trade and exchange rate. Governmentpolicyinterventioncontributestoimprovegrowthperformanceoftheeconomy (Williamson, 2014). RBA uses cash rate to control credit supply and hence, economic growth. Cash rate decision is often influenced by fund rate in USA. Evaluation of all these indicators together provides an understanding of economic performance of Australia in the over a considerably long period. Real GDP growth, inflation and unemployment GDP growth, inflation and unemployment are three vital indicators of performance of an economy. GDP growth reflects the overall growth of the economy. Inflation and unemployment on the hand other hand are related with dynamic movement of price level and labor market performance. GDP growth generally fosters production opportunity (Mankiw,2014). The goods market expansion has a direct effect on factor market. The increased demand for labor reduces hurdles of finding jobs in the labor market. This contributes to a significant reduction in unemployment level. Additionally, economic growth usually comes with an increased demand through boosting average income and reduction in unemployment. The demand side pressure transforms to a higher price level or inflation (Cioran, 2014). The above explained theoretical relationship can be verified through analyzing simultaneous movement of GDP growth along with inflation and unemployment over time. Before making graphical analysis of the trend movement of GDP and inflation, a brief statistical analysis is done using summary statistics and correlation. Table 1: Summary Statistics of real GDP growth, inflation and unemployment Real GDP growth rateInflationUnemployment Mean3.10Mean2.68Mean6.73 Standard Error0.23Standard Error0.28Standard Error0.36 Median3.53Median2.49Median6.10 Mode#N/AMode#N/AMode6.90 Standard Deviation1.21Standard Deviation1.46Standard Deviation1.89 Sample Variance1.46Sample Variance2.14Sample Variance3.58 Kurtosis1.74Kurtosis2.47Kurtosis-0.18 Skewness-1.21Skewness1.15Skewness0.88 Range5.38Range7.02Range6.70 Minimum-0.38Minimum0.25Minimum4.20 Maximum5.01Maximum7.27Maximum10.90 Sum83.6 2 Sum72.3 3 Sum181.6 0 Count27Count27Count27
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4MACROECONOMIC PERFORMANCE OF AUSTRALIA From the summary statistics insights are obtained regarding average movement of the concerned variables, range within which the indicators vary and finally stability of the distribution for the given period. Growth rate in Australia for the time period wad averaged at 3.10%. Economic growth of Australia varied between the rate of -0.38% to 5.10%. Distribution of real GDP growth is less volatile as reflected from the lower standard deviation. Price level is Australia average at 2.68%. The inflation rate varied between the 0.25 percent and 7.27. The small standard deviation indicates that the economy has attained a price level stability over time. Average growth and price level in Australia is though at the satisfactory level but the average unemployment rate is comparatively high. The average estimate for unemployment is 6.73. Rate of unemployment moved in the range from 4.20 to 10.90. Table 2: Correlation between GDP growth and inflation Real GDP growth rate Inflation Real GDP growth rate1 Inflation-0.0196616451 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 -1.00 0.00 1.00 2.00 3.00 4.00 5.00 6.00 7.00 8.00 Real GDP growth and inflation Year GDP growth and inflation Figure 1: Real GDP growth VS inflation Starting from 1990, GDP growth rate in the year was accounted as 3.53. The corresponding inflation rate was 7.27 percent. From the late 1990s, the economy began to slow down with growth rate became negative. The accounted growth rate during this period was -0.38. Associated with the negative growth rate, inflation rate fell to 3.2 supporting the theoretical assertion (Ffrench-Davis, 2016). After that economy though grew at a moderate to stable rate price level remain highly volatile. The period of 1997 was the period of Asian financial crisis. Australia being actively involved in trade with some vital Asian countries (Malaysia, South Korea, Indonesia, Thailand) had realized a recessionary shock during this time. Price level reached to its lowest level mainly to shocks in the exchange rate. Growth and price both recovered. The decade ended with the maximum growth rate of 5.01% while the inflation rate was 1.47 percent. The decade of 2000s, is a phase of almost stable growth rate except in two years -2001 and 2008. The growth rate fell to 1.93 in 2001 with an associated fall in inflation rate to 1.93. The decline in the growth rate during 2009 was largely due to occurrence of global financial crisis (Sarva, 2013). Price
5MACROECONOMIC PERFORMANCE OF AUSTRALIA level low grew at a very slow rate during this time with inflation rate being 1.82. Since 210, economic growth though has increased but price level remains at a stable rate of 1-2%. The price level stability is mainly attributed from monetary policy of Reserve Bank of Australia. Table 3: Correlation between GDP growth and unemployment Real GDP growth rate Unemployment Real GDP growth rate1 Unemployment-0.1255281721 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 -2.00 0.00 2.00 4.00 6.00 8.00 10.00 12.00 Real GDP growth and unemployment Real GDP growth rateUnemployment Year Unemployment and GDP growth rate Figure 2: Real GDP growth VS unemployment Figure 2 represents periodic movement of real GDP growth and unemployment rate.There is an indication of clear adverse relation between GDP growth and unemployment. The negative GDP growth rate of -0.38 percent was associated with a very high unemployment rate of 9.60. With gradual improvement in the GDP growth rate unemployment rate declines. The decadal unemployment rate in 2000s is much lower than that 1990s. The negative correlation between unemployment and GDP growth is supported by the periodic movement of unemployment and Australia. From the graph s convergence is observed between GDP growth and unemployment rate overtime. Mining sector is the main engine of economic growth.Mining industry is a labor intensive sector. Economic growth driven by labor intensive sector indicates a lower unemployment with economic growth (Robinson, Tsiaplias and Nguyen, 2015). Growth history and Business cycle Business cycle also termed as economic or trade cycle explicates upward and downward movement in the long term tend of real gross domestic product. The business cycle contains a point if economic boom and series of contraction in a continuous sequence (Stock and Watson, 2016). Gradual
6MACROECONOMIC PERFORMANCE OF AUSTRALIA expansion of the economy moves it towards boom or peak while continuous expansion results in depression or trough. In the long term trend of real GDP growth of Australia there is series of fluctuation explaining business cycle. The first clear evidence of recession was in the late 1990s. The economic slowdown can be observed from the negative growth rate of -0.38. The period was associated with a low price level along with a high unemployment rate. Economic expansion began thereafter. Again a small recession occurred in 1997 mainly due to Asian financial crisis. The sluggish economic condition can be observed from a slow growth rate, low inflation rate and high unemployment. Recovery from the short recession resulted in an economic boom in 1999 (Tsouma, 2014). It is the highest decadal growth rate. Economic slowdown began from 2000 ended with a moderate growth rate of 4.15 percent in 2004. The next recessionary business cycle phase was in 2009. The economy during this time realized a growth rate of only 1.81. The economic expansion began in 2010 continued till 2012. Again growth fell since 2013. At present, the economy is growing at a relatively slow rate beating the expectation. 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 Real GDP growth rate Year Growth rate Figure 3: Economic growth and Business Cycle Trade and exchange rate International trade constitutes one vital component of GDP of Australia. In 2016, the share of trade in Australia’s GDP was 39.95%. This is lower than that on 2010. The declining trade share is mainly resulted from reduced demand of minerals from China and worse condition of terms of trade. Globally Australia exports coal. Iron ore, primary product like meat, wheat and different services. Australia exports goods mainly in countries like United State, China, India, South Korea and Singapore. Australia depends on different countries for importable like medicament, automobiles, refined petroleum, telecom equipment and freight service. The importing countries of Australia are United State, Germany, China, Thailand and Japan (Australia, 2015). United State being a major import and export partners of Australia, US dollar play an important role in determining over trade volume and trade balance of Australia. In the international market, effective values of goods and services are judged in terms of exchange rate. Exchange rate is ratio of
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7MACROECONOMIC PERFORMANCE OF AUSTRALIA home currency to foreign currency measuring relative value of home currency per unit of foreign currency. if more home currency is needed for per unit of foreign currency then the exchange ratio increase indicating a decline in the value of home currency (Kastelle and Liesch, 2013). This though represents a weak home currency but is favorable for net export. Currency devaluation thus increases net export by making import expensive and export cheaper. Table 4: Summary Statistics of net export and real exchange rate Net ExportExchange rate Mean2015709344 3 Mean1.35 Standard Error6388333393Standard Error0.05 Median3050218907 8 Median1.33 Mode#N/AMode#N/A Standard Deviation 3319475403 7 Standard Deviation0.24 Sample Variance1.10189E+21Sample Variance0.06 Kurtosis- 0.710436358 Kurtosis0.66 Skewness-0.59409697Skewness0.69 Range1.17904E+11Range0.97 Minimum- 5119810051 7 Minimum0.97 Maximum6670581633 3 Maximum1.93 Sum5.44242E+11Sum36.4 4 Count27Count27 Table 5: Correlation between net export and real exchange rate Net ExportExchange rate Net Export1 Exchange rate 0.85464402 1 1
8MACROECONOMIC PERFORMANCE OF AUSTRALIA 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 -60000000000 -40000000000 -20000000000 0 20000000000 40000000000 60000000000 80000000000 0.00 0.50 1.00 1.50 2.00 2.50 Net export and Real exchange rate Net ExportExchange rate Year Net Export AUD/USD Figure 4: Net export VS exchange rate Trend in nest export shows that net export increase till 2001. The exchange rate also constitutes an increasing trend for this period reflecting currency depreciation. The maximum trade surplus is achieved in 2001 with the highest exchange rate of 1.93. After that both net export and exchange rate has dropped simultaneously. In 2012, only 0.97 AUD is needed for 1 unit of US dollar (Bernanke, Antonovics and Frank, 2015). Consequently, the Australia in this year experienced the largest trade deficit. Thus, there is a clear positive relation between net export and exchange rate. Though there can be a number of other factors like global demand, economic condition of export and import partners but still movement of exchange rate a significant determinant factor of net export. Cash rate, fund rate and policy implication Bank rate is the part of monetary policy of central bank of a nation. By varying bank rate, central bank control interest rate and loanable fund supply in the money market.Bank rate is the designed interest rate by central bank for loans given to commercial bank (ValadkhanI and Anwar, 2012). An increase in bank rate increases borrowing cost of commercial banks which is transmitted to high interest rate and hence a decline in investment and economic contraction. This is called tight monetary policy. An expansionary monetary policy on the other hand does the reverse. The policy of monetary easing includes a lower bank rate, followed by an increased supply of credit, higher investment and growth (Hess and Van Wincoop, 2012). The overnight bank rate in Australia is called cash rate and is controlled by RBA. The same in the United State is known as fund rate and is controlled by Federal Reserve. Table 6: Summary Statistics of fund rate and cash rate Summary Statistics cash rateFund rate Mean5.38370 4 Mean3.04231 5 Standard Error0.49351 2 Standard Error0.47225 7
9MACROECONOMIC PERFORMANCE OF AUSTRALIA Median5.125Median3.21333 3 Mode6.5Mode#N/A Standard Deviation 2.56436 3 Standard Deviation 2.45391 9 Sample Variance6.57595 7 Sample Variance6.02172 Kurtosis6.62617 8 Kurtosis-1.26609 Skewness1.96211 3 Skewness0.16008 6 Range13.3333 3 Range8.01 Minimum1.5Minimum0.08916 7 Maximum14.8333 3 Maximum8.09916 7 Sum145.36Sum82.1425 Count27Count27 Table 7: Correlation between cash rate and fund rate cash rateFund rate cash rate 1 Fund rate 0.75897646 2 1 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 16.00 Cash rate and Fed fund rate cash rateFund rate Year Rate
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10MACROECONOMIC PERFORMANCE OF AUSTRALIA Figure 5: Fund rate VS Cash rate The periodic movement of cash rate and fund rate reflects that starting with a very high level they are settled at a very low rate. Following a close economic interdependence, a change in fund rate can cause a change in cash rate. In Fed decides to reduce rate, then it results in a weak currency for US. Weak US dollar on the other hand indicates strong Australian dollar which might hurt Australia export. The RBA then might make a downward revision in cash rate for devaluation of the currency. This indicates a positive association between cash rate and fund rate. Fed reduced the fund rate almost to zero bound after financial crisis in 2008 (Bhuiyan, 2014). The effect of financial crisis also disseminated to Australian economy but with a lower intensity. RBA reduced the cash rate to 3% during this time. The movement of fund rate thus not solely drive cash rate but some relation might be observed because of economic interconnectedness. Australian economic outlook Long term trend of Australian economic growth revealed a gradual slowdown of economic growth since 2013. The growth rate by beating expectation of the policymaker might have expected to bring a recession for Australia. The gloomy outlook however offset by economic expansion realized outside the traditional sector. The phase of decline in mining investment will be finished soon (The Oxford Economics Forecast, 2016). This along with slow growth on mining export will contribute to pick up GDP growth. The ongoing decline in the mining investment will be recovered with potential growth opportunities in the sector. Increased LNG production has opened up a new door for export and growth. Recent impetus to non-mining investment will expand further supporting the future growth prospect. The weak consumption growth will be recovered following a growth in wage rate. The job opportunities outside mining will expand consumption demand and economic growth (Robinson and Wang, 2018). The fear of economic recession thus overcome by economic expansion in several dimension of the economy. Conclusion In conclusion, it can be said that Australian economy has been recorded a stable performance over a long period with a stable rate of economic growth, inflation and unemployment. The average growth and inflation is stable as compare to global standard. The unemployment rate on the other hand recorded a comparatively higher average unemployment rate. The economy realized a recessionary pressure in 1997 and in 2009.The former is caused by Asian financial crisis while the latter followed from global financial crisis. A devaluation of Australian dollar is associated with an increase in net export. The policy of monetary easing is more dominating both for Australia showing interdependence in economic policy framework of both the nation. The recent recovery of domestic economy along with improvement in global activity indicates an awaited economic expansion in next few years.
11MACROECONOMIC PERFORMANCE OF AUSTRALIA References list Bernanke, B., Antonovics, K. and Frank, R., 2015.Principles of macroeconomics. McGraw-Hill Higher Education. Bhuiyan, R., 2014. The Effects of Monetary Policy Shocks in the USA: A Forecast-Augmented VAR Approach.Australian Economic Papers, 53(3-4), pp.139-152. Cioran, Z., 2014. Monetary Policy, Inflation and the Causal Relation between the Inflation Rate and Some of the Macroeconomic Variables.Procedia Economics and Finance, 16, pp.391-401. Economic Outlook, 2016. The Oxford Economics Forecast. 40(2), pp.2-2. Ffrench-Davis, R., 2016. Neostructuralism and macroeconomics for development.Neostructuralism and heterodox thinking in Latin America and the Caribbean in the early twenty-first century. Santiago: ECLAC, 2016. LC/G. 2633-P. p. 117-138. Hess, G. and Van Wincoop, E., 2012.Intranational Macroeconomics. Cambridge: Cambridge University Press. International Trade by Commodity Statistics, 2015. Australia. 2015(1), pp.6-79. Kastelle, T. and Liesch, P., 2013. The Importance of Trade in Economic Development.International Studies of Management and Organization, 43(2), pp.6-29. Mankiw, N.G., 2014.Principles of macroeconomics. Cengage Learning. Robinson, T. and Wang, J., 2018. The Australian Economy in 2017-2018: The Importance of Stronger Non-Mining Business Investment Growth.Australian Economic Review, 51(1), pp.5-20. Robinson, T., Tsiaplias, S. and Nguyen, V., 2015. The Australian Economy in 2014-15: An Economy in Transition.Australian Economic Review, 48(1), pp.1-14. Sarva, S., 2013. Global Financial Crisis and Australian Economy.SSRN Electronic Journal,. Stock, J.H. and Watson, M.W., 2016. Dynamic factor models, factor-augmented vector autoregressions, and structural vector autoregressions in macroeconomics. InHandbook of macroeconomics(Vol. 2, pp. 415-525). Elsevier. Tsouma, E., 2014. Dating business cycle turning points.OECD Journal: Journal of Business Cycle Measurement and Analysis, 2014(1), pp.1-24. ValadkhanI, A. and Anwar, S., 2012. Interest Rate Pass-Through and the Asymmetric Relationship between the Cash Rate and the Mortgage Rate.Economic Record, 88(282), pp.341-350. Williamson, S., 2014.Macroeconomics. Boston, Mass.: Pearson. Sources of Data Abs.gov.au.(2018).6401.0-ConsumerPriceIndex,Australia,Mar2018.[online]Availableat: <http://www.abs.gov.au/AUSSTATS/abs@.nsf/DetailsPage/6401.0Mar%202018?OpenDocument> [Accessed 25 May 2018].
12MACROECONOMIC PERFORMANCE OF AUSTRALIA Data.worldbank.org. (2018). Official exchange rate (LCU per US$, period average) | Data. [online] Availableat:<https://data.worldbank.org/indicator/PA.NUS.FCRF?locations=AU>[Accessed25May 2018]. Fred.stlouisfed.org.2018.EffectiveFederalFundsRate.[online]Availableat: <https://fred.stlouisfed.org/series/FEDFUNDS> [Accessed 21 May 2018]. ReserveBankofAustralia.(2018).CashRate|RBA.[online]Availableat: https://www.rba.gov.au/statistics/cash-rate/ [Accessed 19 May 2018].