Analysis of Australia's Macroeconomic Performance from 1990-2015

This report offers a detailed macroeconomic analysis of Australia's economic performance spanning the years 1990 to 2015. It meticulously examines key indicators such as real GDP growth, interest rates (cash rate), unemployment rates, inflation rates, exchange rates (AUD/USD), and net exports. The analysis includes summary statistics, correlation analysis to reveal relationships between these variables, and graphical representations to illustrate trends. The report explores the interplay between GDP and various macroeconomic factors, including the impact of monetary policy (cash rate) on growth, the Phillips curve relationship between inflation and unemployment, and the influence of exchange rates and net exports. Furthermore, it discusses the future outlook for the Australian economy, supported by relevant economic evidence, and concludes with a summary of the findings. The report aims to provide a comprehensive understanding of the Australian economy's stability and growth over the specified period.

Running Head: MACROECONOMIC PERFORMANCE OF AUSTRALIA
Macroeconomic Performance of Australia
Name of the Student
Name of the University
Author note

1MACROECONOMIC PERFORMANCE OF AUSTRALIA
Executive Summary
The paper aims in evaluating macroeconomic performances of Australia for the last twenty-
six years from 1990 to 2015. The key macroeconomic indicators of an economy are growth
rate in real GDP, interest rate, unemployment rate, inflation rate, exchange rate and net
export. Data are collected for each of these variables and are analyzed to depict economic
performance overtime. The policy implication and future outlook of the economy has also
presented with relevant evidences. The economy turns out to be a relatively stable economy
with a standard growth rate, stable price level and unemployment.

2MACROECONOMIC PERFORMANCE OF AUSTRALIA
Table of Contents
Introduction................................................................................................................................3
Economic evaluation..................................................................................................................3
Summary Statistics.................................................................................................................3
Relation between GDP and different macro variables...............................................................4
GDP growth and cash rate......................................................................................................4
GDP growth and unemployment rate.....................................................................................5
GDP growth and inflation rate...............................................................................................6
GDP growth and exchange rate..............................................................................................7
GDP growth and net export....................................................................................................8
Relation between inflation and unemployment..........................................................................9
Tight Monetary Policy.............................................................................................................10
Future outlook for Australian economy...................................................................................11
Conclusion................................................................................................................................11
References................................................................................................................................12
Appendix..................................................................................................................................14

3MACROECONOMIC PERFORMANCE OF AUSTRALIA
Introduction
Australian economy is one of the highly developed nation of world. The economy has
the structure of a mixed market economy. The economy has recorded an uninterrupted
growth rate for the last few decades making it 14 largest economies in world. The economy is
largely dominated by the service sector. Service sector alone contributes 61.1 percent of total
GDP. More than 70 percent of the labor force is engaged in service sector. Because of the
widely spread market structure it has become an attractive export destination. The nation has
a huge stock of natural resources with mining industry has made a significant contribution in
GDP. Both manufacturing and service sector are the main pillars of economic resilient in
Australia.
Economic evaluation
Gross Domestic Product (GDP) of an economy is a measure of monetary valuation of
goods and services produced in a nation. GDP is one important attribute of economic growth.
An increasing trend indicates toward an economic growth. There are several components
determining GDP of a nation. Some are directly linked with GDP while others have an
indirect connection (Hubbard and O'brien, 2015). The economic variables having direct or
indirect relation with GDP growth rate are interest rate (cash rate), inflation, unemployment,
exchange rate and net export.
Summary Statistics
The data for last 26 years on each of the above-mentioned indicators are collected.
The basic statistics of the variables are summarized as follows. Real GDP is a GDP measure
that is computed using a fixed base year. This is an inflation-adjusted measure of GDP. The
rate of change in real GDP between two consecutive years is called growth in real GDP. The
average real GDP growth in Australia is 3.11%. During this span, the highest growth rate is
accounted in 1999 with a growth rate of 5.01%. The nation accounted a negative growth rate
of -0.38% in 1991.
The interest rate that Reserve Bank of Australia charges on loans given to other banks
in the economy is known as the cash rate. The cash rate for the chosen period is averaged at a
rate of 5.63%. As shown from the data the highest cash rate is charge in 1990 with a rate of
15.23 and recently in 2015, the cash rate reached to a recorded low level of 2.13%.
As far as unemployment rate is concerned, the average unemployment rate is 6.77%.
The unemployment rate reached to its peak level in 1994 and lowest rate of unemployment is
recorded in 2008 with a recorded rate of 4.40%. Australia has maintained a more or less
stable price level with inflation rate averaged around 2.73%. For the given time period the
inflation rate was stared with a highest rate of 7.27% in 1990. In the same decade, in 1997 the
price level has reached to its lowest level of 0.25%.
The next two variables considered are exchange rate and net export. These two
variables are inter related. In times of currency depreciation, export increases and import
decreases causing a rise in net export. The exchange rate between Australian dollar and US
dollar are taken. Australia and US share a strong trade relation (Berger-Thomson and
Chapman 2017). The average exchange rate between the two nations is 1.35. Australian
dollar highly appreciated in 2011 and 2012. During this time Australian dollar valued 0.97
per unit of US dollar. In 2001, Australian dollar depreciated maximum with exchange rate
being 1.93.

4MACROECONOMIC PERFORMANCE OF AUSTRALIA
Australia is engaged in trade relation with many nations. The average trade balance in
the chosen period is 20.310 billion AUD. Australian enjoyed a maximum trade balance of
66.706 billion AUD in 2001 following high depreciation of exchange rate. There is a trade
deficit of -51.198 billion AUD because if high imports resulted from currency appreciation.
Relation between GDP and different macro variables
Correlation between GDP and five indicators
Real GDP
growth rate
Interest rate
(Cash rate)
Unemploy
ment rate
Inflatio
n rate
Exchange rate
(AUD/US)
Net
expor
t
Real GDP
growth rate 1
Interest rate
(Cash rate) -0.08 1
Unemployme
nt rate -0.13 0.28 1
Inflation rate -0.03 0.64 -0.23 1
Exchange rate
(AUD/US) 0.20 0.04 0.26 0.08 1
Net export 0.23 0.26 0.55 -0.02 0.85 1
GDP growth and cash rate
Cash rate in Australia is the rate at which reserve bank lends to commercial banks. A
low cash rate means commercial banks can borrow from the reserve bank at a cheap rate
(Bernanke, Antonovics and Frank, 2015). This increases the availability of loanable funds in
banks. Interest rate being the cost of investment, a low interest rate is expected to increase
investment in the economy and hence, GDP. Therefore, usually an inverse relation exists
between cash rate and GDP growth rate.
The result of correlation analysis supports this assertion. The correlation between
GDP growth and cash rate is -0.08.
1990 1995 2000 2005 2010 2015 2020-2.00
0.00
2.00
4.00
6.00
8.00
10.00
12.00
14.00
16.00
18.00 GDP growth rate and cash rate
Real GDP growth rate Interest rate (Cash rate)
Year
Rate (%)
Figure 1: GDP growth and cash rate
(Source: rba.gov.au, 2018)

5MACROECONOMIC PERFORMANCE OF AUSTRALIA
The Australian economy has maintained a standard growth rate. The economy
advanced a growth rate of 0.6 percent in the last quarter of 2017. The positive contribution in
growth is coming from non-dwelling construction sector. The construction sector added on an
average 0.9 percent in growth. The component of GDP such as household consumption and
export has made respective contribution of 0.1 percent and 0.4 percent. The contribution from
government expenditure is relatively less showing a weak fiscal policy.
Cash rate is a monetary policy tool of reserve bank of Australia. The trend shows as
cash rate starts decreasing GDP growth rate increases. The low cash rate is an indicator of
expansionary monetary policy. The cash rate has a continuous declining rate. In order to
stimulate economic growth, RBA has lowered the interest rate as much as possible
(McCombie and Thirlwall, 2016). In 2015, the cash rate was as low as 2.13 percent and is the
lowest in its 26 years period. The low interest rate by boosting economic growth provides a
great support to the economy.
GDP growth and unemployment rate
The status of employment in an economy depends on the production activity, which is
indicated from the GDP. The growth in GDP implies an expansion of productive activity
creating new sources of employment opportunities (Heijdra, 2017). Therefore, there should
be an expected inverse relationship between the two variables. The estimated correlation
coefficient between GDP growth rate and unemployment rate is -0.13. This implies an
increase in GDP means a decline in unemployment rate and vice versa.
1990 1995 2000 2005 2010 2015 2020
-2.00
0.00
2.00
4.00
6.00
8.00
10.00
12.00
GDP growth rate and unemployment rate
Real GDP growth rate Unemployment rate
Year
Rate(%)
Figure 2: GDP growth rate and unemployment rate
(Source: data.worldbank.org, 2018)
The GDP growth rate and unemployment rate moves in opposite direction. As the
GDP growth rate increases, the unemployment decreases. With economic growth, the
employment in Australia has increased significantly. Total employment has increased to
12.44 million rising nearly by 34.7 thousand. The unemployment has mostly reduced due to
an increase in part time employment rate (tradingeconomics.com, 2018). The participation
rate among the labor force increases by 0.2 percent. The participation rate has increased
above the expected rate.

6MACROECONOMIC PERFORMANCE OF AUSTRALIA
GDP growth and inflation rate
Inflation rate captures the rise in general price level. A low to moderate inflation is
good for economic growth. When price level increase because of stimulation in demand then
this encourages producers to produce more. However, if inflation is caused from rising cost
then this is not beneficial for the economy (Mankiw, 2014). A high debt associated high
inflation rate hampers economic growth. The correlation between GD growth and inflation
from historical data of Australia turns out to be -0.03. Though inflation is supposed to
increase GDO growth rate but in case of Australia, the relation does not hold because of high
debt.
1985 1990 1995 2000 2005 2010 2015 2020
-1.00
0.00
1.00
2.00
3.00
4.00
5.00
6.00
7.00
8.00
GDP growth rate and inflation rate
Real GDP growth rate Inflation rate
Year
Rate (%)
Figure 3: GDP growth and inflation rate
(Source: data.worldbank.org 2018)
The inflation rate and GDP growth rate is moving in the opposite direction. The
inflation rate is currently in a historically low level following RBA’s expansionary monetary
policy. The RBA has set the cash rate to a recorded low level because of a weak growth in the
domestic economy. The price level in Australia is moving at a relatively slow rate. The fall in
prices observed for food and non-alcoholic beverages, cloth and footwear, household
equipment, services, communication, and furnishing (Shafiullah, 2014). Some products such
as tobacco, electricity, alcoholic beverages and transport. However, there is an overall
declining trend in inflation.
GDP growth and exchange rate
Exchange rate is the value of one country’s currency measured in terms of currency of
some other country. An increase in exchange rate means depreciation of domestic currency.
When currency depreciates then export becomes cheaper. A rise in export means an increase
in net export, which in turn implies a growth in GDP (Hartwell, 2017). The correlation
coefficient between growth and exchange rate is 0.20. This implies a positive relation
between growth and exchange rate.

7MACROECONOMIC PERFORMANCE OF AUSTRALIA
1985 1990 1995 2000 2005 2010 2015 2020
-1.00
0.00
1.00
2.00
3.00
4.00
5.00
6.00
GDP growth rate and exchange rate
Real GDP growth rate Exchange rate (AUD/US)
Year
Figure 4: GDP growth and exchange rate
(Source: data.worldbank.org, 2018)
The value of Australian dollar in terms of US dollar is stabilized between 1 to 2. The
trend in GDP growth and exchange rate though is not similar but positively related.
GDP growth and net export
Net export shows the trade balance that is export earnings less import spending. A
positive trade balance implies export earnings exceeds import spending. This adds to
economic growth of the nation (Gregory and Smith, 2016). The correlation between GDP
growth and net export is 0.23. The positive correlation implies a rise in net export is
associated with a rise in GDP.
1990 1995 2000 2005 2010 2015 2020-200
0
200
400
600
800
1000
1200
1400
Net export and Real GDP
Net export Real GDP
Year
AUD/billion
Figure 5: Real GDP and Net export
(Source: data.worldbank.org, 2018)
Australia has accounted a rising trade deficit for the last few years. The trade deficit
resulted from an increase in the volume of import while export remains at the same level. The
imports of consumption goods, intermediate goods, capital goods especially
telecommunication equipment has increased. The service import also increases. As far as the
export is concerned sales of non-rural goods, mineral fuels, metals, mineral ore and service

8MACROECONOMIC PERFORMANCE OF AUSTRALIA
export has increased (Salahuddin et al., 2015). The export of non-monetary gold has declined
and the new export for merchandise remain unchanged.
Relation between inflation and unemployment
The general relationship between inflation and unemployment is explained by Phillips
curve. The theory of Phillips curve, developed by A.W. Phillips suggests an inverse and
stable relation between inflation and unemployment. The simple explanation of Phillips
relation is that economic growth generally come with a high inflation rate (Bishop and
Cassidy, 2017). The high inflation encourages production by increasing profit margin. With
expansion in production, more jobs are created and this likely to reduce unemployment rate.
Figure 6: Phillips curve
(Source: Mankiw 2014)
Correlation between inflation and unemployment
Unemployment rate Inflation rate
Unemployment rate 1
Inflation rate -0.23 1
The correlation between inflation and unemployment is estimated as -0.23. Therefore,
the historical trend of inflation and unemployment supports the relation explained by the
Phillips curve.

9MACROECONOMIC PERFORMANCE OF AUSTRALIA
3.00 4.00 5.00 6.00 7.00 8.00 9.00 10.00 11.00 12.00
0.00
1.00
2.00
3.00
4.00
5.00
6.00
7.00
8.00
Unemployment
Inflation
Figure 7: Relation between inflation and unemployment
At the initial stage, the inverse relation between inflation and unemployment holds
good. However, after 1990 recession the relationship has shifted. The Phillips curve becomes
flatter. During this time, there was a fall in price level with unemployment level stuck
following a shortage of aggregate demand (Lin and Cheng 2016). This is partly due to a
decline in inflation expectation. The severe inflation in 1991 led to a steep decline in the rate
of annual inflation. This reduces the inflation expectation. There was a persistent
unemployment in the economy as firms shed full time employment and replaced with part
time employment. In the middle of 1990s, the aim of RBA’s monetary policy was to achieve
the twin objectives of an average inflation ranged between 2 and 3 percent and a desirable
level of output and inflation (rba.gov.au 2018). For this, RBA first sets an inflation targeting
and then adjust interest rate or cash rate.
Tight Monetary Policy
A tight monetary policy is set to stabilize the price level from an unusually high level.
During 1980s, RBA had undertaken a tight monetary policy to reduce inflationary pressure.
The cash rate had reached to a very high level during this time (Bauer and Neely, 2014). In
1990, the targeted cash rate was 15.23%. The rate though reduced slightly in the next year but
remained at a high level of 10.64%. However, the tight monetary policy in 1980s ended up
with a severe recession in 1991. To rescue the economy from recessionary shocks monetary
policy again eased with a declining nominal and real interest rate. However, in the middle of
2000s, RBA again resort to a tight monetary policy (smh.com.au, 2018). From 2004, onward
RBA had gradually started raising the cash rate with the belief that a tight monetary policy
might help the economy to slow the growth in domestic demand and control inflation. An
increase in the home loan rate would tight the financial condition. This would help to reduce
household debt.
Future outlook for Australian economy
The future outlook of the economy is based on the current and past performance
trend. The forecasted growth rate is happened to be between 2.5 and 3.5 percent and is
expected to achieve a rate of 3 to 4 percent in the coming quarters of 2018. A persistently low
interest rate will stimulate economic activity and will boost household demand. Instead of a

10MACROECONOMIC PERFORMANCE OF AUSTRALIA
modest growth in average income demand is expected to gain necessary stimulus from the
low interest rate. The growth outlook towards wage rate is relatively week depressing average
household income (Mishkin, 2017). Despite a low saving ratio of household, investment will
gain momentum from residential construction and investment. Following a low wage growth,
the inflation expectation will continue to remain at a low level. The economic has reduced the
risk of recession in the coming years through a percentage fall in housing price (abc.net.au,
2018). With increase in non-mining investment, different business gains risk mitigating
chances of possible recession.
Conclusion
The paper evaluates macroeconomic performance of Australia for a significantly long
period. The economy being one of the developed nation in world has maintained stable
growth rate averaging around 3.11 percent. The RBA by reducing the cash rate attempts to
provide necessary support to the economy. The unemployment rate is declining with job
growth in different sectors. Price level is also in a fairly stable state. The economy suffers
from a trade deficit for the last few years as experienced from a currency appreciation. The
monetary policy in Australia has passed through different phases. RBA takes expansionary or
tight monetary policy depending on the economic state. The country with its strong growth
rate and support received from central bank has minimized the risk of future recession.

11MACROECONOMIC PERFORMANCE OF AUSTRALIA
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