BUS700 Economics of Key Macroeconomic Indicators
Produce summary statistics (in tabular form) of real GDP growth rates, inflation rates, unemployment rates, exchange rates, real interest rates and the rate of change of net exports (NX) and briefly comment on each variable.
Produce pair-wise graphs of real GDP growth rates, inflation rates, unemployment rates, exchange rates, real interest rates and the rate of change of net exports (NX).
Use the information obtained in (2.2) and (2.3) above to answer the following questions:
Critically analyse and discuss plausible economic explanations, including the role of government policy (fiscal or monetary), for the salient relationships between real GDP growth and other indicators.
Based on your summary statistics, graphs and analysis and discussion above, write a short prediction of the macroeconomic outlook of Australia. Is Australia likely to experience a recession or expansion soon?
Answer:
Economic performance of the Australian economy
For some time now, the Australian economy has been characterized by robust economic growth. Mainly, this is attributed the economy’s great control over most of its macroeconomic components among them the level of inflation, real interest rate, balance of payments, and unemployment among others. Currently, economic forecasts reveal that the economy will experience healthy economic growth this year. The level of business confidence in the country has increased significantly, something that has led to an increase in the level of business activity in the aggregate economy. There is also a rising credit growth in the private sector which has substantially stimulated growth of the economy. In this regard, the prevailing economic conditions in the country are promising and symbolize prospects for further growth in the medium and long term.
Summary statistics of key macroeconomic indicators
|
|
2012 |
2013 |
2014 |
2015 |
|
GDP per capita (USD) |
68,108 |
64,857 |
61,362 |
51359 |
|
GDP (USD billion) |
1,561 |
1,510 |
1,449 |
1,230 |
|
Economic growth (%) |
3.6 |
2.1 |
2.8 |
2.4 |
|
Unemployment rate (%) |
5.2 |
5.7 |
6.10 |
6.10 |
|
Interest rates |
|
|
|
|
|
Exchanges rate (vs USD) |
1.04 |
0.89 |
0.82 |
0.73 |
|
Exchanges rate (vs USD, aop) |
1.04 |
0.97 |
0.90 |
0.75 |
|
Trade balance (USD billion) |
6.1 |
20.3 |
11.9 |
-13.1 |
|
Inflation rate (CPI, annual variation in % eop) |
2.2 |
2.8 |
1.7 |
1.7 |
|
Inflation rate (CPI, annual variation in %) |
1.8 |
2.5 |
2.5 |
1.5 |
|
Inflation (PPI annual variation in %) |
1.2 |
1.6 |
1.7 |
1.4 |
Source: (ABS, 2017).
Relationship between Economic Growth and Other Key Macroeconomic Indicators
Economic growth and Inflation Rates
It is imperative to note that the level of inflation in Australia has been rising and falling systematically in the period between 2012 and 2017. As such, consumer prices in the country have been rising and falling intermittently due to various factors. In 2012, the level of inflation in the country was recorded at 1.8 percent. In the following year, it rose sharply by about 0.7 percent to 2.5 percent (ABS, 2017). Afterward, the level remained constant in 2014 at 2.5 percent before falling to 1.35 percent in 2016. At the beginning of this year, the level of inflation rose to 1.5 percent in January. Likewise, the rate of inflation in the country rose further to 2.1 percent in the April quarter (Trading Economics, 2017).
It is worth to note that the level of inflation in the country has a significant impact on the degree of economic growth. Holding other macroeconomic indicators in the economy constant, a high level of inflation results in a decrease in the value of money in the country. Thus, the prices of goods and services in the economy rise, making imports cheaper. Contrariwise, the international community considers the goods in the country expensive. In turn, this reduces the level of exports from the country. An increase in the level of imports accompanied by a decrease in the level of imports results in a decrease in the country’s net exports which in turn worsens the balance of payment in the country. Subsequently, this results in a reduction in economic growth in the nation.
Besides, a rise in the level of inflation rates in the economy results in a decline in business confidence among investors, both local and international. Therefore, high levels of inflation in the country reduces the level of investments, which in turn negatively influences the level of economic growth in Australia. However, a small inflation level in the economy stimulates growth. In the first quarter of this year, for instance, the level of inflation in the country rose from 1.3 percent in the December quarter of 2016 to 1.5 percent in the January quarter of 2017. As a result, of the 0.2 percent increase in the level of inflation in the nation, the GDP growth rate rose sharply from -0.5 percent in the last quarter of 2016 to 1.1 percent growth at the beginning of the year. Therefore, it is imperative to note that the small increase in the rate of inflation in the country simulated the economy towards an increased level of growth. However, it should be noted that high level of inflation in the country are dangerous and may shrink the level of economic growth within Australia.
GDP growth and Unemployment Rate
Just like inflation, there is a significant relationship between the level of economic growth experienced in Australia and the unemployment rates that prevail. Typically, a reduction in the level of joblessness in the country is linked to an increase in economic growth. Fundamentally, the country’s seasonally adjusted unemployment rate has been rising and falling periodically over the past few years. According to ABS (2017), the unemployment rate in the country was estimated at 5.2 percent in 2012. In the following year, this rate increased sharply by about 0.5 percent. In 2014, the level of unemployment further increased to 6.1 percent. Afterward, the joblessness rate in the country remained constant at 6.1 percent in 2015 before dropping to about 5.7 percent in 2016. Imperatively, the rate of unemployment declined by about 0.1 percent between December 2016 and January this year (ABS, 2017).
It is imperative to note that the decrease in the rate of joblessness in the country was also accompanied by a substantial increase in the level of economic growth. By and large, this can be attributed to the fact that a decline in the level of joblessness within Australia allowed individuals to earn a decent income. In turn, this allowed them to demand goods and services, thereby raising the aggregate demand in the economy. Primarily, an increase in the nation’s aggregate demand translates to economic growth. Therefore, during this period, a decline in the rate of joblessness in the country brought about substantial increases in the country’s economic growth ceteris paribus.
Economic Growth and Real Interest rates
It is imperative to note that there is a plausible relationship between real interests in the country and the level of economic growth that prevails. According to economic theory, a reduction in the level of real interest rates results in a subsequent increase in the level of investments in the nation. In turn, an increase in investments within the country leads to an increase in the aggregate demand, which in turn results in an upsurge in the rate of employment. Consequently, this raises the country’s national income. Thus, there is a positive relationship between the level of interest rates in the economy and the economic growth.
Over the past few months, the level of real interest rates in the country has been falling consistently. Mainly, this is an effort by the country’s monetary authority to stimulate the level of investments in the country. In April 2016, the level of interest rate in the country was 2 percent. Later, in July, the interest rate level further dropped to about 1.75 percent before dropping again to 1.5 percent in October. Since October 2016 to April 2017 the real interest rates in the country have remained constant at 1.5 percent. It is imperative to note that this is the lowest rate of interest experienced in the country since 1990. Profoundly, the RBA set the cash rate at 1.5 percent with the aim of stimulating economic growth in the country a slightly above 3 percent in the near future.
Fundamentally, the low-interest rates have been observed to positively affect the level of economic growth in the country over the past few months. In July, interest rates in the country were about 1.75 percent. At this point, the level of economic growth in the country was 8 percent. Afterward, when the cash rate was reduced, the level of growth dropped drastically as the market was adjusting to the shocks in the economy before picking up and rising significantly in January this year. Therefore, if the low-interest rates are maintained in the country, then the economy is expected to experience further economic growth in the medium term.
Economic Growth and Exchange Rates
The Australian economy is mainly compared to the US dollar. Thus, the exchange rate between the US dollar and the Australian dollar is an important indicator of the performance of the country’s currency with the rest of the world. In economic theory, an increase in the Australian currency results in an appreciation of the country’s exchange rate while a fall in the value of the exchange rate results in the weakening of the Australian dollar. Primarily, a depreciation in the country’s currency makes the goods and services produced in the economy to be cheaper for the international market, thereby leading to an increase in the level of exports from the country. However, imports become more expensive for the local people, thereby leading to a reduction in the level of imports into the country. Consequently, this increases the net exports of the country, thereby enhancing economic growth. In contrast, the appreciation of the AUD makes exports expensive and imports cheaper, thereby leading to a decrease in the net exports of the country. In turn, this results in a decrease in economic growth.
It is worth pointing out that the exchange rate of the Australian currency with the US dollar has constantly been declining over the past few years. In 2012, the exchange rate was 1. 04. Later, in 2013, this rate reduced to 0.89 before falling further down to 0.82 in 2014(Trading Economics, 2017). In the following year, the exchange rate in the country further dropped to 0.73 (Trading Economics, 2017). As at May this year, the AUDUSD exchange rate was recorded at 0.7498. The lowest exchange rate recorded in the country was 0.48 in 2001 (Trading Economics, 2017).
Economic Growth and Balance of Payments
There is a significant relationship between the level of economic growth and the country’s rate of change of net exports. As such, economic growth increases when the economy achieves an equilibrium balance of payment. In this case, the level of international debt of the country is reduced, thereby facilitating substantial increases in the level of economic growth in the economy (“Australia GDP.” 2017). fundamentally, the Australian economy has been striving to improve its balance of payment condition for the past few years. For this reason, the level of economic growth has also been increasing as a result of a decrease in the balance of payment deficits.
The Role of Fiscal and Monetary Policy
The country’s fiscal and monetary policy play a significant role in influencing the level of economic growth in the country. By and large, these policies are utilized to influence the level of inflation, interest rate, unemployment and other major economic indicators, which in turn affect the level of economic growth in the country.
Fiscal Policy
Essentially, fiscal policies in Australia refers to the change in the rate of taxation and government spending with the aim of influencing the level of economic activity in the aggregate economy (Carmignani, 2017). Notably, fiscal policy in Australia is developed and implemented by the government through the Congress. According to economic theory, a decrease in the level of taxation or an increase in the level of government spending leads to an increase in the rate of economic growth in the economy. Mainly, this is because a decrease in the tax rate increases the amount of disposable income available to the citizens, who then raise their spending level. Consequently, this raises the aggregate demand in the nation, thereby facilitating economic growth.
In the same way, an increase in government spending results in an increasing in the level of demand for services and goods by the government in the economy. Hence, this raises the aggregate demand, thereby leading to economic growth. Over the past few years, the Australian government has strived to implement expansionary fiscal policies in the country by increasing its expenditure on capital projects of development (Australian Government, 2017). In addition, the level of corporate taxes has been slashed slightly in the recent past. All these factors combined have acted as a significant stimulus to the economy, thereby led to slight increases in the level of economic growth.
Monetary Policy
Apart from fiscal policy, the Australian economy relies upon monetary policy to influence the level of economic activity in the country. Predominantly, monetary policy refers to the actions undertaken by the monetary authority to influence the level of money supply and interest rates with the aim of achieving macroeconomic policy objectives within the economy (RBA, 2017). In Australia, monetary policy is set, implemented and conducted by the Reserve Bank of Australia. Primarily, the RBA utilizes various monetary policy instruments among them the cash rate, selective credit control, Reserve Requirements, Open Market Operations, and Moral suasion among others.
Profoundly, the RBA uses the cash rate to influence the level of interest rates in the economy. A change in the cash rate has a ripple effect on other forms of interest rates in the nation. As such, a decrease in the cash rate in the economy results in a drop in the interest rate at which commercial banks borrow from the Central Bank (ABC, n.d.). In turn, this influences the level of interest that commercial banks charge businesses and individuals. Therefore, when the cash rate is low, other interest rates in the country are also low (ABC, n.d.). Consequently, a low-interest rate level results in an increase in the rate of investment in the country, thereby stimulate economic growth.
In addition to the cash rate, the RBA uses open market operations (OMO) to influence the level of money supply in the economy. If the monetary authority perceives that there is too much money in the economy, it sales government securities in the open market. In turn, this action results in the mopping up of excess money from commercial banks (Dolamore, n.d.). This is a contractionary measure. On the other hand, when it perceives that the money supply in the economy is limited, it purchases government securities from the commercial banks, thereby leading to an increase in the money supply in the economy (RBA, 2017). Furthermore, the monetary authority uses the exchange rate targeting, interest targeting and inflation targeting to influence the level of aggregate activity in the economy.
Based on the available data on the prevailing conditions in the Australian economy, it is rational to believe that the country will experience an expansion in the medium term. Mainly, one can attribute this to the fact that the economy has set a low-interest rate level which is expected to stimulate the level of aggregate activity in the economy by increasing the level of investments hence increase employment rate. So far, the set target cash rate has brought about slight increases in the level of growth in the economy. Besides that, the level of inflation in the economy is also expected to be relatively low (Statista, 2017). Thus business confidence in the economy is high, in turn, this is expected to enhance the degree of business activity in the economy, thereby stimulate economic growth (Statista, 2017). Therefore, all factors considered the economy is expected to experience an expansion in the near future.
Conclusion
All in all, all factors considered the Australian economy is exhibiting great prospects for economic growth. Generally, the outlook reveals that the economy is healthy with relatively low inflation rates and interest rates. In turn, this has boosted the level of economic growth. However, the level of unemployment in the country is relatively high and the Australian government should devise a strategy to maintain inflation at low levels. By so doing, the level of growth in the country will improve significantly.
Reference List
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