An Analysis of the Macroeconomic Environment of Australia

This report provides a comprehensive analysis of the macroeconomic environment of Australia, examining key indicators such as GDP, inflation, unemployment, and exchange rates. It delves into the current trends in economic growth, highlighting the impact of government expenditure and household consumption. The report also explores the objectives and limitations of monetary policy, focusing on the role of the Reserve Bank of Australia (RBA) and its decisions regarding the official cash rate. Furthermore, it discusses the implications of changes in the cash rate and the determinants of long-run economic growth. The analysis incorporates relevant figures and data from various sources to illustrate the macroeconomic conditions and their impact on the Australian economy. The report concludes with a discussion of the challenges faced by macroeconomic policymakers and the factors influencing the country's financial stability.

Running head: MACROECONOMIC ENVIRONMENT OF AUSTRALIA
Macroeconomic Environment of Australia
Name of the Student
Name of the University
Author Note

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Table of Contents
Introduction......................................................................................................................................3
Macroeconomic goals of the Australian economy..........................................................................3
Current trend in economic growth.............................................................................................3
Gross Domestic product (GDP)..................................................................................................3
Inflation rate...............................................................................................................................3
Unemployment rate.....................................................................................................................3
Exchange rate.............................................................................................................................3
Government debt.........................................................................................................................3
Other macroeconomic indicators...............................................................................................3
Stage of business cycle................................................................................................................3
Objectives of monetary policy.........................................................................................................3
Functions of the Reserve Bank of Australia..............................................................................3
Limitations of the monetary policy.............................................................................................3
Justification for unchanged official cash rate..................................................................................3
Implications of changes in the cash rate in future....................................................................3
Definition of economic growth........................................................................................................3
Determinants of long-run economic growth..............................................................................3
Effect of low interest rate............................................................................................................4
Conclusion.......................................................................................................................................4

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Introduction
The Australian government has been striving to attain the triangular goals of domestic
poise, external poise and financial growth under a single economic framework. These triangular
objectives are aimed at retaining the sustainable financial growth. Several studies conducted in
the concerned ground have asserted that the Australian economy is greatly influenced by the
overseas business cycle. The economic growth does not approach good signs even though
holding the inferior inflation rate and controlling the corpus of the foreign debts and liabilities.
The paper has strived to investigate impact of the macroeconomic signs, including, GDP,
business cycle, inflation and unemployment on the Australian economy. According to the
statistics, the Reserve Bank of Australia (RBA) has implemented various macroeconomic
stabilization monetary policies to recover the economic progress of Australia. However, most of
the policies have brought negative impacts on investment, consumption, public expenditure,
housing market and the broader economy. This has triggered a great challenge for the macro-
economic policymakers. On this account, the RBA Governor has decided to keep the cash rate
unchanged to maintain the target inflation and unemployment rate of the Australian economy, as
stated in the monetary policy of December 3, 2019. The data source has revealed that the official
cash rate has reached the historical low level of 1.5% in May 2019 with respect to August 2016.
However, the monetary authority has planned to reduce the cash rate to 0.75% in October and it
would remain same till December 2019.
Macroeconomic goals of the Australian economy
Following the Global Financial Crisis, the macroeconomic goals of the Australian
Government have been evolving around the inflation pressure and unsustainable economic

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growth (Doherty, Jackman & Perry, 2018). According to the economic theory, GDP,
employment, exchange rate and government debt to GDP ratio are considered as the fundamental
parameters to judge the macroeconomic condition of Australia.
Current trend in economic growth
Figure 1: Economic growth trend in Australia (January 2017 – July 2019)
Source: Source: (Tradingeconomics.com, 2020)
The figure 1 states that the economic growth has slipped down tom 0.4% in July 2019 as
compared to 0.6% of the last quarter. The reported figure has also missed the target rate of 0.5%.
This discouraging economic expansion is considered as the outcome of diminishing government
expenditure and household consumption. The economic growth has been expanded by only 1.7%
through out the third quarter of the year. Therefore, this can bring regressive impact on the
country’ goods and services, which is in turn, affects the per capita income of Australia. The
GDP per capita has been reported to fall by 3.5% (approximately) from 2018 to 2019.

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Gross Domestic product (GDP)
Figure 2: GDP of Australia (January 2017 – July 2019)
Source: (Tradingeconomics.com, 2020)
According to figure 2, GDP growth in Australian has exhibited slight improvement of
1.7% which is better than the initial GDP growth of January 2019. However, the growth rate has
decelerated as compared to the last year. The diminishing annual GDP growth is considered as
the consequence of the global economic crisis and uncertainty related to the international
economy.

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Inflation rate
Figure 3: Inflation Trend in Australia
Source: (Tradingeconomics.com, 2020)
Referring to figure 3, the inflation rate has been raised to 1.8% in the recent year which
reflects sharp development of the inflation rate with respect to the last year. The data reveals that
the average price of food and beverages has achieved the highest incremental rate of 2.6% over
the last five years. Nonetheless, the growing inflation rate has reduced the household
consumption within the domestic market.

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Unemployment rate
Figure 4: Unemployment rate trend in Australia
Source: (Tradingeconomics.com, 2020)
Figure 4 describes that Australia has recently faced the lowest unemployment rate of
5.1% which is even lower than the expected unemployment rate of 5.2%. The improvement in
the employment rate is the expected outcome of improvement in the part-time employment rate.
Meanwhile, it has been observed that the full-time employment rate has decreased by the
significant level (Muchdie, 2017). Hence, the improving employment condition is not likely to
bring effective outcome for the Australian economy.

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Exchange rate
Figure 5: Exchange rate trend in Australia
Source: (Rba.gov.au, 2020)
The figure 5 reveals that the Australian currency has been falling with respect to the
dollar since the last year. This devaluation of the currency turns the imported goods expensive.
Therefore, the domestic consumers will have to pay more if they purchase goods and services
from foreign countries (Manalo, Perera & Rees, 2015). On the contrary, it makes the exports
goods cheaper for the foreign customers. As a result of that, the profit of the exporters gets
declined during the depreciation of the exchange rate.

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Government debt
Figure 6: Government Debt to GDP in Australia
Source: (Altman, 2018)
Figure 6 explains that the country’s public debt has been accounted for 41%
(approximately) of GDP 2018. The figure highlights that a huge potion of GDP has expensed for
meeting the foreign debt over the last couple of years. This implies that national income has been
swiped out to meet the demand of the domestic customers.
Other macroeconomic indicators
Apart from the above - mentioned macroeconomic indicators, employment participation
rate, performance of the trade and manufacturing sector are other influencing factors for the
Australian economy. As per the study, the contribution of the domestic labors has been reported
to get declined in respect of the foreign labors. The overwhelming participation rate of the
overseas labors triggers a great challenge for the economy as it lowers the per capita income of
the average national workers. Meanwhile, the recent trade strife between the USA and China has
aggravated the uncertainty situation in the global trade market. The lower participation rate of

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exporters intensifies the country’s debt and liabilities over the credit balance. This aggravates the
financial pressure on the foreign reserve.
Stage of business cycle
The one of the principle macroeconomic objects of the government is to counter the
fluctuation impact of the business cycle (Jacobs, 2015). Over the last couple of years, the
Australian economy has been undergoing contraction situation which can be addressed by lower
inflation rate and real GDP growth. It has been observed that lower GDP growth results in the
deteriorating purchasing power of the consumers.
Objectives of monetary policy
The objectives of the monetary policy are to keep stability in the average price level, low
unemployment rate and progressive economic growth. In this regard, bank credit, interest rate
and money supply are the key implementation tools of the monetary policy. In general, the
monetary policy is classified into two types, such as, expansionary and contractionary monetary
policy (Healy, 2014). The implementation of the monetary policy depends on the economic
situation. The government prefers to follow expansionary policy during the course of recession,
while, contractionary monetary policy will be followed during inflation. In the background of the
Australian economy, the cash rate plays the key role to enhance the success of the monetary
policy.
Functions of the Reserve Bank of Australia
Reserve bank of Australia (RBA) operates in Australia through the RBA Act 1959. The
Australian Government is the controller of the bank. The RBA determines the functions of the
monetary policy in accordance with the economic condition of Australia. Moreover, the

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organization works for the issue of currency notes to maintain stability in the reserve fund. The
estimated fund of RBA is approximately $105 billion. Its core responsibility is to manage the
country’s foreign reserve account. It is the last lending resort to the Australian government and
commercial banks. The bank is aimed at improving the constancy and proficiency of the
financial system. RBA is the solo controller of the official cash rate (McKibbin, 2016). Cash rate
refers to the lending rate of the commercial banks for taking loan from RBA. Commercial Banks
increases the interest rate when the official cash rate hikes.
Limitations of the monetary policy
The monetary policy is regarded as the most powerful measurement to restrain the
inflation rate. Control of the interest rate promotes the economic welfare of a country. However,
the monetary policy does not yield effective outcome owing to having some constraints. The first
limitation is subject to the sustainable development of the economy. The study has observed that
inflation is the solo motive of the monetary policy. Excessive control over the interest rate results
in the reduction of the average purchasing power of the economy (Allen, 2015). RBA has been
trying to keep the interest rate as below as possible to boost the investment in the economy.
However, the housing market has barely faced any improvement even after reducing the interest
rate to 1%. This result surely denotes the ineffectiveness of the monetary policy. On this account,
it can be said that monetary policy can be effective for short-term, but not for long-term
economic solution (Metaxas & Weber, 2016).
Justification for unchanged official cash rate
As per the statement, the RBA Governor has set the official cash rate unchanged to
maintain the target inflation rate in the range of 2 to 3% and unemployment rate around 5.25%.
The lower cash rate has been decided to hold owing to having downside risks associated with the

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global economy. Meanwhile, the corporate bonds debt has reported to narrow down in response
to the increase in the equity price level. Australian equity has reached the highest price level in
the last July. In addition to that, the political unrest is another influencing factor to set the low
cash rate (O'Donnell, 2014). The concerned authority believes that the spillover effect of the low
cash rate will likely be transferred to financial market. Government bond is expected to get
improved due to the unchanged cash rate. Over the last year, the government bond has declined
sharply by 1% as a result of declining funding cost. This has further headed to the depreciation of
the Australian currency in the international market. The depreciation value is reported to be
around 6% which is a great concern for the Australian exporters. The devaluation of the
exchange rate has extended the gap between the interest rate of the loan. Moreover, the
dwindling condition of the estate market is predicted to be improved as a result of the consistent
cash rate (Apergis, 2014). Nonetheless, the lending to the small business has experienced a
significant change (Gilfillan, 2018). The data reveals that the small business has not been
improved as per the expectation level owing to having credit limitations in the existing banking
system.

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Implications of changes in the cash rate in future
Figure 7: Expansionary monetary policy
Source: (Robinson, Nguyen & Wang 2017)
As per the statement, diminution in the cash rate from 1% to 0.75% is counted as a step
of the expansionary monetary policy. The authority decides to slash down the inflation rate as to
encourage the investors. The loan cost declines if banks charge less interest rate for the
customers. The customers will be taking more loans from the banks as they are required to make
less interest payment (Pandya & Sisombat, 2017). The improvement of the monetary policy
reflects the rightward shift of LM curve from LM1 to LM2. As money supply increases, the
people demand for less money. This in return causes reduction in the interest rate from r1 to r2.
This further expands the investment as well as increase the total output from Y1 to Y2.
Altogether, the economic equilibrium decreases from E to D.

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Figure 8: Contractionary monetary policy
Source: (Robinson, Nguyen & Wang 2017)
Figure 8 describes the impications of the contractionary monetary policy. This policy
allows the cash rate to increse to a signifcant level. In terms of the statement, the cash rate has
increased from 1% to 1.5%. The authority usaully advances the cash rate to control the inflation
rate. The economy faces inflatoion when the average price level hikes to an extreme level. This
extreme increase in the price level reduces the purchasing power of the customers as the public
expenditure remaons same (Ally, Gardiner & Lane, 2016). The public expenditure is stated by IS
curve. As a cumulative impact of the increasing commodity price and constant government
sending, RBA tries to congtrol the purchasing power by hiking the cash rate. The cash rate has
been improved from r2 to r1 as a result of the contractionary movement of the LM curve from
LM0 to LM1. It has bdeen observed that the contractionary monetary policy results in the
downsize impact on the national income level from Y0 to Y1.

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Definition of economic growth
Economic growth refers to the growing capacity of goods and service production across
the successive periods. The traditional tools used for measuring the economic growth include
GNP and GDP (Schwartz & Tan, 2016). However, there are several countries have been
registered low score in terms of the economic development even after exhibiting significant
economic growth. Referring to the Australian economy, the country has counted under top ten
most developed countries across the world (Downes, Hanslow & Tulip, 2014). However, the
concerned economy has been suffering from declining consumer demand as well as dwindling
performance of the estate market.
Determinants of long-run economic growth
According to the economic theory, the determinants of the long term economic growth
include labor force contribution and demographic change. The economic growth can be
perceived for the long term if the money supply matches with the market demand. The exiting
economic factors are required to be consumed following a definite structure to derive optimum
output for the economy. It has been noticed that, long-run economic growth gets hampered due
to lack of structural development (Altman, 2018). For instance, the wage rate gets increased
during inflation period. However, the employment rate does not get improved in the long run as
real wage remains unchanged for long run. Hence, employment, real wage and government debt
are the important determinants to measure the economic growth in the long run.
Effect of low interest rate
The low interest rate reduces the loan purchasing cost, which in turn, lowers the capital
expenditure of the investors (Tyers, 2015). In this way, the people start taking more loans for the
investment purpose. The growth in the investment level augments the national output of the

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economy. In economy, lower cash rate accelerates the wealth generation program for the
economy. Therefore, growth in the credit market leads to the advancement of the housing
market.
Conclusion
The paper concludes that the unchanged cash rate is the most effective tool for the
Australian economy to overcome the current economic crisis. The dwindling condition of the
housing market coupled with the lower consumer demand is the great concern for the
macroeconomic policy makers. Since the global financial crisis 2008, the economic policies are
aimed at developing a sustainable economy for the country. The economy will be sustainable if
economic resources are being used at the optimum level and the available job opportunity
guarantees the full employment of the existing labor. The economic growth will not be hampered
for any external factors like, trade dispute, political unrest and international trade agreements.
The economic development needs to be self – sufficient to counter the falling export demand and
unsteady financial market.

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