PACC6009 Business Law : GDP and Real Interest

Introduction

This paper seeks to analyse the macroeconomic performance of Australian economy over 26 years from 1990 to 2015. Major macroeconomic variables such as real GDP, real interest rate, inflation rate, unemployment rate, exchange rate and net export have been used in the performance analysis. Interest rates, Real GDP are real variables in this discussion and others are nominal variable. Real variables are adjusted with inflation rate in order to get better comparison (Baker, Merkert and Kamruzzaman 2015). Future economic outlook is discussed based on historical data. Real GDP and real interest has been calculated based on nominal values.

Real GDP growth rate

Table 1: Real GDP growth rate

(Source: data.worldbank.org 2017)

Table 2: Summary statistics of Real GDP growth rate

(Source: created by author)

The summary statistics of real GDP shows the mean value of the real GDP growth rate is negative. Real GDP is calculated dividing nominal GDP by GDP deflator (Makin and Narayan 2013). Hence, this variable is inflation adjusted for the convenience of the analysis. Although nominal GDP has positive trend, mean real GDP growth rate is negative. As the mean and median values are different, the pattern of data is asymmetric. Standard deviation of the values is very high. Values are negatively skewed and skewed to the left as mean value is less than median (Burda and Wyplosz 2012). As kurtosis is greater than 3, data set has weightier tail compared to normal distribution.

Inflation rate (CPI)

Table 3: Inflation rate

(Source: ato.gov.au 2017)

Table 4: Summary statistics

Mean inflation rate in Australia is 2% over the 26 years. Standard error and sample variance is very low for this distribution. The distribution is almost symmetric as mean and median values are close to each other. Skewness is close to zero due to symmetric of data. Negative kurtosis indicates flatter distribution (Newbold, Carlson and Thorne 2012).

Unemployment rate

Table 5: Unemployment rate data

(Source: data.worldbank.org 2017)

Table 6: Summary statistics of unemployment data

Mean value indicates that unemployment rate in Australia is around 6% over the 26 years. Unemployment rate is high in Australia due to the monetary policy of Reserve Bank of Australia. Mean is greater than little greater than median, indicating distribution of data is asymmetric. Standard error is very low indicating greater reliability of the data. Negative kurtosis indicates flatter distribution. Flatter distribution indicates pattern of data is similar over the years and values are close to mean value. Distribution is positively skewed, although skewness is low. Range is the difference between highest and lowest value of the distribution indicating spread of the data.

Exchange rate

Table 7: Exchange rate trend of Australia

(Source: data.worldbank.org 2017 )

Table 8: Summary statistics of exchange rate

Exchange rate of Australia compared to US has been varied around 1.3, which is stable. Standard error of the distribution is very low indicating less sampling fluctuation. Overall nature of the data reflects the characteristics of the entire data set that is nature of exchange rate fluctuation in Australia. Data have positively skewed distribution with longer tail to the right. Kurtosis is positive means data set has greater peak than normal distribution. .

Real interest rate

Table 9: Real interest rate of Australia

(Source: rba.gov.au 2017)

Table 10: Summary statistics of real interest rate distribution

Real interest rate has been calculated subtracting inflation rate from the nominal interest rate. CPI inflation rate has been taken for4 this calculation. Average real interest rate between 1990 and 2015 in Australia is close to 2.6. Real interest rate reflects the cost of borrowing over the years or real yield for lenders (Smales 2013). Sampling fluctuation is less with low standard error. Mean and median value is close to each other although mean is greater than median. Little asymmetries are there in the distribution. Skewness is towards low value of the distribution.   

Rate of change in net exports

Table 11: Growth of net export distribution

(Source: data.worldbank.org 2017)

Table 12: Summary statistics of change in net export

Positive mean value indicates, growth in net export from Australian economy has been negative on average with a low value. However, the summary statistics show that difference between mean and median is very large and hence distribution is asymmetric. Sample variance is extremely large, which is not accepted. High value of kurtosis indicates distribution has heavy tail towards higher value and with longer tail towards right as indicated by skewness. Distribution is hence Cauchy (Newbold, Carlson and Thorne 2012). It indicates in some years, net export growth is very high compared to low value and fluctuation is distribution is very high. Difference between high and low value of net export is also very high as indicated by range. Negative mean growth in export may be due to significance fluctuation in values in different years. During 2007, growth in net export has dropped due to global financial crisis. However, negative export growth in recent years indicates that import of goods and services in Australia is greater than export.

Correlation values

Table 13: Correlation between variables

Correlation value is relation between dependent and independent variable. If real GDP growth rate is assumed to be dependent variable and other five are independent variables, then Real GDP growth rate has positive relation with real interest rate, exchange rate, net export growth and unemployment rate, however, negative relation with inflation rate. It indicates, higher inflation has reduced the growth rate of real GDP (Burda and Wyplosz 2012). Unemployment rate and inflation has a normal negative relation. Exchange rate has negative correlation with net export growth during 1990-2015. Mutual relationship between other variables is positive.

Economic explanation

Above findings reveals that real GDP growth rate in Australia is not stable and has been fluctuating over the years although there is increase in nominal GDP. Real value of GDP is not rising much. Real GDP growth rate has negative correlation with inflation rate. Increasing inflation rate has reduced the value of real GDP. Therefore, higher inflation is not good for the Australian economy. Hence, the primary objective of the highest monetary authority of RBA is keeping inflation at low rate. The target inflation rate of RBA for Australian economy is 2% of GDP (rba.gov.au 2017). RBA has chosen to trade off inflation rate with unemployment rate. In order to keep inflation rate at low level, monetary policy is set in Australia to sacrifice employment. Hence, unemployment rate remains always at a higher level around 6%. Growth in service sector has dramatically surpassed the manufacturing and agricultural sector in Australia. Therefore, scope of employment has reduced in those sectors (Wray 2015). Mining sector has significant contribution in Australian GDP, which is also experiencing a slow down in recent years. During global financial crisis, the growth in net export has fallen significantly, although the country has recovered quickly after 2010.

In order to boost up the economy, real interest rate has been cut by RBA over the years. As real interest rate falls, investment becomes less costly. Rise in investment expenditure further increases GDP to get out of deflationary pressure. Low real interest rate has been kept with the expectation of keeping inflation low (Hutchens 2016). Business investment can enhance the productivity of the economy, employment and wage in long run. Low interest rate encourages investors to invest more in the economy. Exchange rate is also stable in this country. However, as seen in figure 6, fluctuation in real interest is greater than official exchange rate of Australia. Monetary policy in Australia is strong to handle any monetary shock. Only concern for this economy is low growth rate in real GDP and high unemployment rate.

Macroeconomic outlook

Overall macroeconomic performance can be said to be moderate. Inflation, real interest rate is prospective for Australian economy, whereas, real GDP growth, net export growth and decrease in unemployment are not satisfactory. Real GDP growth trend is highly fluctuating. Nominal GDP and real GDP has been falling in Australia since 2014. Decreasing growth rate indicates that recession if Australian economy fails to improve its condition from current situation. Decreasing inflation rate or deflation is a major concern for the economy. Low CPI inflation means low demand for goods and services for the economy. Unemployment rate in Australia has fallen to 5.72 during 2016.

In order to improve from this situation, the government has to tight fiscal policy as well. In order to boost up the domestic economy, higher investment, low unemployment, infrastructure development, export growth are required for better outlook of Australia. Stable exchange rate can be used for betterment of trade in global market.

Conclusion

The report has highlighted several macroeconomic variables for Australian economy. The economy has improved significantly since 1990s till now. Australian economy has not been much affected by global financial crisis, however, economic performance is not satisfactory during 2013-15 indicated by real GDP growth, rising real interest rate. Inflation and exchange rate are relatively stable compared to other macroeconomic variables. Negative performance is not sustained from long term. Hence, fear of recession is less. Australia has tight monetary policy. However, government needs to emphasise on the job creation and increasing investment to boost up the economy.

References

ato.gov.au, 2017. Consumer price index (CPI) rates. Available at: https://www.ato.gov.au/Rates/Consumer-price-index/

Baker, D., Merkert, R. and Kamruzzaman, M., 2015. Regional aviation and economic growth: cointegration and causality analysis in Australia. Journal of Transport Geography, 43, pp.140-150.

Burda, M. and Wyplosz, C., 2012. Macroeconomics: a European text. Oxford university press.

data.worldbank.org, 2017. Australia. Available at:  https://data.worldbank.org/country/australia?view=chart [Accessed 26 May 2017].

https://www.theguardian.com/australia-news/2016/aug/03/interest-rates-why-the-reserve-bank-of-australia-has-been-cutting-away

Hutchens, G., 2016 Interest rates: why the Reserve Bank of Australia has been cutting away

Makin, A.J. and Narayan, P.K., 2013. Re-examining the “twin deficits” hypothesis: evidence from Australia. Empirical economics, pp.1-13.

Newbold, P., Carlson, W. and Thorne, B., 2012. Statistics for business and economics. Pearson.

rba.gov.au, 2017. Historical Data | RBA. Reserve Bank of Australia. Available at: <https://www.rba.gov.au/statistics/historical-data.html> [Accessed 26 May 2017].

Smales, L.A., 2013. Impact of macroeconomic announcements on interest rate futures: high?frequency evidence from Australia. Journal of Financial Research, 36(3), pp.371-388.

Wray, L.R., 2015. Modern money theory: A primer on macroeconomics for sovereign monetary systems. Springer.