RMIT University ECON1010 Macroeconomics Policy Brief Analysis

This assignment is a policy brief analyzing the macroeconomic impact of the COVID-19 pandemic on the Australian economy. It begins with a diagnostic analysis of key economic indicators such as real GDP growth rate, inflation rate, and unemployment rate, identifying recessionary phases. The report then predicts the impact of the pandemic on the Australian economy, highlighting vulnerabilities in the tourism, education, and mining sectors. The brief concludes with policy recommendations, including fiscal, monetary, and macro-financial measures, to combat the impending recession. These recommendations emphasize increased government spending on public health, monetary policy adjustments, and measures to support businesses and maintain exchange rate stability. The analysis uses data up to March 2020 and is aimed at advising the Prime Minister on appropriate economic responses.

Running head: MACROECONOMICS
Macroeconomics
Name of the Student
Name of the University
Course ID

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Table of Contents
Part A: Diagnostic Analysis.............................................................................................................2
Part B: Policy Brief..........................................................................................................................5
Subject:........................................................................................................................................5
Executive summary.....................................................................................................................5
Recommendations........................................................................................................................5
Economic rationale......................................................................................................................5
References........................................................................................................................................7

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Part A: Diagnostic Analysis
Name of the GDP indicator: Real GDP growth rate
Presentation
Figure 1: Trend in real GDP growth rate
Justification
Real GDP of a nation measures the monetary value of aggregate output that is adjusted
for inflation. By eliminating the impact of changes in price level, real GDP gives an accurate
measure of aggregate output (Heijdra 2017). Percentage change in real GDP termed as real GDP
growth rate is therefore a valid indicator of economic downturn or recession.
Identification of recession
Recession of an economy can be measured in terms of steady decrease in the economic
activity lasting for few months. One recessionary phase for Australia is identified between march
1982 to June 1983.Three other recessionary phase as identified from trend in real GDP growth
rate ranged from June 1990 to December 1991, December 2000 to June 2001 and from
December 2008 to September 2009.
Name of the CPI and Wage indicators: Year ended inflation rate (Consumer Price Index)
Presentation
Figure 2: Trend in inflation rate

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Justification
Percentage change in consumer price index or inflation is one vita indicator for
movement for price level (Uribe and Schmitt-Grohe 2017). Since movement of overall prices is
considered as a good indicator of economic stability, rate of inflation has been taken into
consideration.
Identification of recession
During recession, there is a continuous decline in inflation rate of the economy. Periods
having a continuous decline in inflation rate include September 1983 to December 1984, March
1991 to December 1992, March 1997 to March 1998, September 2001 to June 2002, December
2008 to September 2009.
Name of the labor market indicator: Unemployment rate
Presentation
Figure 3: Trend in unemployment rate
Justification
Unemployment rate represents number of unemployed person as a percentage of labor
force. Unemployment rate by representing state of labor market indicates the business cycle
phase that the economy is undergoing (Agenor and Montiel 2015).
Identification of recession
Recession is associated with a decline in economic activity and therefore a steady
increase in unemployment rate. Phases with steady increase in unemployment ranged from
November 1981 to September 1983, July 1990 to December 1992, February 2001 to October
2001 and December 2008 to June 2009.

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Prediction about the COVID-19 pandemic impact
At present, the biggest threat for the global economy is the outbreak of coronavirus.
Currently Australia is expected to be the one of the worst affected nation due to COVID-19
pandemic (Butler 2020). The vulnerability of Australian economy has risen from shut down of
different factories in China and ceased movement of people from China to Australia. The lock
down in China will cause loss of billion dollars of revenue that Australia generate from tourism
and education sector. The shutdown of China’s manufacturing sector will lower the demand for
Australian mineral exported to China. Ore mine in Australia is one sector that is vulnerable to
declining demand from China.
The tourism sector of Australia is facing significant threat from lockdown in China.
China alone accounts for 15 to 16 percent visitors of Australia making significant contribution to
the sector. The spending by China’s tourists is three time greater than that compared to American
tourist. Tourists from China nearly spend $12- $16 billion greater than the combined spending of
tourists coming from America, New Zealand, British and Japanese (Farrer 2020). The tourism
sector is not only affected in terms of decline in number of tourists but also in terms of spending
on travelling packages and other shopping expenses. Contraction of these spending will have a
material impact on the Australian economy.
Another vulnerable sector for Australian economy is the education sector. Revenue
generated by the sector from overseas students’ amounts around $34 billion. With this the sector
is considered as the second biggest export earning sector only after iron ore (Butler 2020).
Banning the movement of students will also hurt the economy.
Besides the impact on service sector and that of mining spread of the virus is expected to
affect productivity and growth of Australia by disrupting flow of inputs used in the production
process. There is expected to be a decline in size of labor force because of sickness of workforce.
The productivity of capital is also expected to decline because disruption in global supply chain.
Increase in government expenditure and technological shocks will again hamper the productivity.
All these together expected to decline GDP of Australia by $34.2 billion (Pwc.com.au. 2020).
Another impact of spread of COVID-19 pandemic is the decline in value of Australian
dollar as measured against USD. Overall, the predicted contraction of economic activity
measured by GDP due to COVID-19 pandemic is by 1.32 percent.

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Part B: Policy Brief
Briefing for the Prime Minister
Subject: Policy recommendation for Australian economy to fight COVID-19 pandemic
Executive summary
The macroeconomic analysis of three major macroeconomic indicators imply the
economy undergone short period of recession during 1981-82, 1986-87, 1991-1992, 2001-2002
and 2008-09. Currently, the economy is on the verge of another recession because of spread of
COVID-19 pandemic. In order to rescue the economy from the upcoming recession appropriate
policy measures need to be taken.
Recommendations
A combination of fiscal, monetary and macro-financial policy needs to be undertaken to
combat the recession. On the fiscal ground government should increase spending on public
health expenditure. On the monetary front RBA needs to cut policy rates to stimulate economic
activity. Besides government should focus on reducing the number of personal and lower
corporate bankruptcies to ensure that people have money to support their necessary spending
even if they are not able to do their jobs. Measure also needs to be taken to maintain stability in
the foreign exchange rate.
Economic rationale
The diagnosis of macroeconomic environment of a nation depends on analysis of
selective macroeconomic indicators. Movement of these indicators represent business cycle
phase that the economy is currently undergoing. In order to identify macroeconomic state of
Australia three indices are selected which include real GDP growth rate, inflation rate and
unemployment. Observation of trend of these indicators reveal that the economy experienced a
short span recession during 1981-82, 1986-87, 1991-1992, 2001-2002 and 2008-09. Given the
nature of economic resilient, Australia successfully recovered the recession within a shorter span
(Megalogenis 2016). At present, Australia is facing a threat of economic recession due to rapid
spread of COVID-19 pandemic. Sectors highly vulnerable because of the pandemic include
tourism, education and mining sector. Spread of the pandemic is expected to affect size of the
workforce, productivity of capital, supply chain and technological disruption. There is a chance
of weakening of Australian dollar measured against USD. All these will cause a contract of
aggregate output by around $34.2 billion. The economic growth is expected to contract by 1.32
percent. Contraction in economic growth will hamper other related indicators such as inflation,
unemployment and others.
The count of COVID-19 cases is reported to be increased day by day. As of 31st March
2020, the number of COVID-19 positive cases in Australia is 4557. Of the confirmed cases
number of death count is 19. The rapid spread of the disease has triggered a health emergency to
the entire economy (health.gov.au 2020). To support the economy under such a circumstance
government should increase its spending on public investment and health care expenditure.
Spending needs to be increased for intensive care units, ventilators and beds to accommodate the
patients with appropriate medical facilities. Measures should also be taken to prevent spread of
the disease across the community. For this, the health care sector, government and community

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needs to make joint participation. An important measure here is to increase public awareness
among the people. Government should investment in public communication and ensure that
accurate, up to date and consistent information are given to the public regarding spread and
impact of the disease.
The decision of economic lockdown has an adverse effect in terms of supply side
disruption. The shortage of supply will lead to an upward pressure of price level making goods
unaffordable. Government here needs to reduce personnel and lower bankruptcies so that
monetary support can be provided to people to continue their spending even under circumstances
where people are unable to go to work. In order to smoothen the money supply in the RBA
should sought to buy government bonds in the secondary market (Ehnts 2016). RBA need to
conduct a more frequent repo operation to further support the liquidity in the economy. Greater
credit availability and relatively low policy rate is expected to give the economy necessary
stimulus to overcome the upcoming recession.
In the exchange rate market Australian dollar is used as proxy for Chinese Yuan. With
economic slowdown in China because of the spread of coronavirus there is a depreciation of
Australian dollar as against USD. Maintaining stability in the exchange rate is one objective of
RBA’s monetary policy. Given the current financial turmoil, government should allow the
exchange rate to adjust flexibly to the current economic shock (imf.org 2020). Any exchange rate
control measure can result in an additional burden on RBA and therefore, it is best to leave the
exchange rate to float freely in the market.

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References
Agenor, P.R. and Montiel, P.J., 2015. Development macroeconomics. Princeton university press.
Butler, B. 2020. Coronavirus recession? Expert modelling shows Australian economy could take
huge hit. [online] the Guardian. Available at:
https://www.theguardian.com/world/2020/mar/03/coronavirus-recession-expert-modelling-
shows-australian-economy-could-take-huge-hit [Accessed 31 Mar. 2020].
Ehnts, D.H., 2016. Modern monetary theory and European macroeconomics. Taylor & Francis.
Farrer, M. 2020 Theguardian.com. Coronavirus economic impact: Australia could be among
world's hardest hit nations | Coronavirus outbreak | The Guardian. [online] Available at:
https://www.theguardian.com/world/2020/feb/08/coronavirus-economic-impact-australia-could-
be-among-worlds-hardest-hit-nations [Accessed 31 Mar. 2020].
health.gov.au 2020. Australian Government Department of Health. Coronavirus (COVID-19)
current situation and case numbers. [online] Available at:
https://www.health.gov.au/news/health-alerts/novel-coronavirus-2019-ncov-health-alert/
coronavirus-covid-19-current-situation-and-case-numbers [Accessed 31 Mar. 2020].
Heijdra, B.J., 2017. Foundations of modern macroeconomics. Oxford university press.
imf.org 2020. Policy Responses to COVID19. [online] Available at:
https://www.imf.org/en/Topics/imf-and-covid19/Policy-Responses-to-COVID-19#A [Accessed
31 Mar. 2020].
Megalogenis, G., 2016. Quarterly Essay 61: Balancing Act: Australia Between Recession and
Renewal (Vol. 61). Quarterly Essay.
Pwc.com.au. 2020. [online] Available at: https://www.pwc.com.au/publications/australia-
matters/economic-consequences-coronavirus-COVID-19-pandemic.pdf [Accessed 31 Mar.
2020].
Uribe, M. and Schmitt-Grohe, S., 2017. Open economy macroeconomics. Princeton University
Press.