Macroeconomic Performance Analysis of Australia

Introduction

            Australia, one of the most developed nations of the world has astonished the whole world through fast growth and development. Undoubtedly, Australian growth propelled by growth of its mining industry. Australia is a leading suppliers of coal, iron ore and petroleum. Service sector is another strong base of the economy (Stevens, 2015). Performance evaluation of Australia include analysis pf GDP, unemployment, inflation, export, import, exchange rate, cash rate and other reacted attributes.  Output expansion has an influence on employment and cost of living. GDP growth has a spillover effect on employment growth. Pryce level also flourished with economic growth nut is subject to government intervention. The most important determinant of global demand is the exchange rate among trading partners. Currency devaluation is a favorable trade policy as this helps to encourage export demand while discouraging import demand. Reserve Bank of Australia changes cash rate to constraint credit (McCombie and Thirlwall, 2016). Federal Reserve uses fund rate for the same purpose. The decisions of two nations are often interconnected based on their international relation.

Interrelation between real GDP growth, inflation and unemployment

            Interconnectedness among different macroeconomic performance indicative variables is one important aspect of the study of macroeconomics. Real GDP is an output measure where market values of output are computed using a constant base price. Economic growth, a measure of overall economic performance is represented from the rate of growth of real GDP.  The improvement in GDP growth comes along with improvement in labor market performance and that of price level (Kleinert, Martin and Toubal, 2015). When an economy realizes a faster growth in its GDP then there is an enlargement of productive activities. In the process, demand of labor increases. As it becomes less difficult for people to find a job unemployment reduces. GDP growth on the other hand by increasing income and demand causes price level to rise. High inflation however has a distortionary effect on living standard and hence, is controlled through active intervention mostly though monetary policy (Hansen, 2017).

 Analysis of relation with summary statistics

Table 1: Summary Statistics of real GDP growth, inflation and unemployment

Objective of the summary statistics is to provide a brief overview of the scenario of GDP growth in association with unemployment and inflation. Results indicate that the economy has expanded at an average rate of 3.10% for a considerably long period from 1990 to 2016. The average growth rate is associated with unemployment growing at an average rate of 6.73 while that of average inflation is 2.68. The decade of 1990s was a vital turnover period for Australia (Plummer and Tonts, 2015). Most of the economic fluctuation took place during this time. The economic growth rate varied between its lowest level of -0.38% in 1991 to its highest level of 5.01 percent in the year of 1999.  Similar is the case for rate of inflation. The inflation rate widely varied between 7.27 percent in 1990 to its lowest of 0.25 percent in 1997. The recorded unemployment is highest in 1993. However, it was not until 2008 that the economy reaches to its lowest level.

Summary Statistics of Real GDP Growth, Inflation, and Unemployment

Correlation analysis

            Correlation represents degree of association between two or more variables. From the sign and magnitude of estimated correlation, direction and strength of the relation among the variables of interest.

Table 2: Correlation between GDP growth and inflation

 Degree of association between inflation and GDP growth is obtained as -0.02. The negative but very small value of correlation indicates a weak inverse relation between the two inflation and GDP growth. Implication of the correlation result is that dynamically inflation moves to the opposite direction of GDP growth in Australia (Rahman, Shahbaz and Farooq, 2015).

 Table 3: Correlation between GDP growth and unemployment

 Correlation between unemployment and GDP growth is -0.13. The data thus supports the theoretical relation of unemployment and GDP growth, where GDP growth is likely to be moved in favor of labor market performance (Murtin and Robin, 2016). The GDP growth of Australia thus supports employment growth and helps to reduce unemployment rate.

Analysis using pair wise graph

            The results of statistical analysis can have supported from a graphical representation of concerned variables. Two pair wise graph is used showing movement of GDP growth and inflation and GDP growth and unemployment. 

 Figure 1: Relation between real GDP growth and unemployment

In the beginning of 1990s, the gap between GDP growth and unemployment rate was considerable high. The main reason for huge difference between unemployment and real GDP growth is the presence of high unemployment rate in the Australia. Economic growth gradually increases towards its stable growth rate (Meredith, 2015). Unemployment however declined at a very rapid filling the gap between unemployment and GDP growth. In 2008, unemployment rate approaches very close to real GDP growth. After that, because of a slow growth rate of Australian economy, unemployment and inflation diverged but not to the extent as that was during 1990s.

 Figure 2: Relation between real GDP growth and inflation

From the graph, no steady relationship has found between GDP growth and inflation. The trend shows that the economy has successfully achieved a stable state. Economic growth though creates an upward pressure on price level, but it is successfully encountered by anti-inflationary policy of RBA.

Growth evaluation with business cycle

Business cycle explains GDP growth with four relevant phase. Dynamic movement of GDO growth is subject to for four consecutive phases of business cycle – expansion, peak, recession and trough (Klein, 2017). 

Figure 3: GDP growth with business cycle phases

Correlation between GDP Growth and Inflation, and GDP Growth and Unemployment

The economy of Australia experienced year of growth fluctuation associated with different phases of business cycle. For the periods taken into consideration, there are three years of economic recession 1990, 2001 and in 2009 (Powell, Ryan and Lamb, 2017). The recessions occurred in these years are characterized with low rate of economic growth, high rate of unemployment and low inflationary pressure. After the recession of 1990s, the economy though began to expand from 1993 but it was in 1999, when the economy reached to its peak growth rate of 5.01. The economy again passed through recession and expansion but entering to a dramatic growth slowdown in 2009 with rate of growth being only 1.81 percent. Economic growth began to recover from 2010. The economic slowdown from 2013 again marked a recessionary pressure but given the resilient nature of the economy it maintains an average growth rate of 2.5%.

Exchange rate and net export

            Net export is a measure of overall trade account of a nation. It represents he net gain or net loss from participating in trade. Australia has established a string trade relation with several other nations through exporting products in line with competitive advantage and imports the products needed by consumers and for different industries. The large reserve of mineral resource provides Australia a comparative advantage over mineral product encouraging export of iron ore, gold, aluminum and others (Guiry et al., 2015). Australia has made rapid development in service sector and therefore, export services such as financial service, professional service and travel service.

Among several trade partners of Australia, United State holds an important position with bulk export and import of trade. As there are differences in currency measure, in the exchange relation modeled through trade depends on exchange ratio between currency. Most goods and services in the global market is valued in terms of standard US dollar (Rizvi, 2017). Also United State itself is an important trade partner of Australia. The exchange ratio between USA and Australia thus have important implication in determination of net export.

Table 4: Summary Statistics of net export and real exchange rate

Table 5: Correlation between net export and real exchange rate

The correlation matrix indicates a strong positive association between net export and exchange rate. The exchange rate data are collected between Australia and USA showing how much Australian dollar needs to be exchanged for one US dollar (Bernanke, Antonovics and Frank, 2015). Positive association indicates that with more Australian dollar needs to be exchanged against one US dollar higher is the net export and vice versa.Figure 4: Relation between net export and exchange rate

Graphical Representation of GDP Growth and Inflation, GDP Growth and Unemployment, and GDP Growth with Business Cycle Phases

 The summary statics shows maximum trade surplus of 66705816333 in 2001. The large size trade surplus is associated with the highest exchange ratio of 1.93. The huge deficit of -51198100517 in 2012 on the other hand is attributed from the lowest exchange ratio of 0.97. The graph above also supports the positive association between trade balance and AUD/USA exchange rate. Currency depreciation this is favourable for net export while currency appreciation does not (Afonso and Lagos, 2015).

 Cash rate and fund rate

Reserve Bank of Australia uses cash rate to control credit supply. This is the rate that commercial banks are liable to pay on borrowed sum of money from the reserve bank. The central monetary authority in USA is the Federal Reserve (Baker, Bloom and Davis, 2016). It uses fund rate to manipulate supply of credit. When the economy needs growth stimulus, the bank rates are lowered to relax credit constraint. The rate though depends on the internal structure of domestic economy and state of growth, but interrelation is found to exists between movement of interest rates between nations.  The economy of Australia and that of USA are strongly interconnected in terms of export, import and foreign investment. As change in bank rate influence internal and external economic activity any change in Fed fund rate might cause a change in associated cash rate.

Table 6: Summary Statistics of fund rate and cash rate

 Table 7: Correlation between cash rate and fund rate

 The correlation table shows a positive relation between cash rate and fund rate. An increase in fund rate thus makes an upward revision of price level while decrease in fund rate causes a resulted decrease in cash rate. 

 Figure 5: Relation between fund rate and cash rate

Realizing growing importance of monetary policy both the nations have relied on an easy monetary policy. Cash rate has declined from its highest level of 14.83 in1990 to 1.5 in 2016.the fund rate has declined from 8.10 in 1990 to 0.40 in 2016. Particularly after hit of global financial crisis, fund rate marked a considerable decline to regain the economy from shock of the crisis (Johnson, 2017). The easy monetary policy if Federal government influenced RBA to lowered the cash rate as well to protect the economy the indirect vibes of the crisis. Monetary stimulus however is less intensive in Australia than that in USA. This is reflected from the prevailing higher cash rate in Australia as compared to fund rate in United State.

Summary Statistics of Net Export and Real Exchange Rate

Outlook for Australian economy                

            Future of an economy depends on trend of past performances and capacity of domestic economy to absorb any external and internal shocks.  The mining boom of Australia which accelerated the economic growth for more than two decades has ended Owing to country’s dependence on mining industry, a decline in global mining demand has resulted in a slow economic growth. Low wage growth has decline private consumption and instable housing market lowered investment in construction sector. The two strong traditional sectors (mining and construction) though have experienced a sluggish growth rate but outside these sectors business investment are growing indicating a sign of growth recovery in next few years.

The economy has focused on shifting export base from iron ore to new resources like liquefied natural gas. Export growth of LNG will take the place of traditional minerals in future. RBA has decided not to lower the cash rate further (Powell, Ryan and Lamb, 2017).  This will help to stabilize the housing market. Stimulatory public investment on inventories will contribute to business expansion and economic prosperity. Traditional export however might face a trouble because of disruption in some major coal port and poor weather condition affecting agricultural export. Overall, the economy is likely to experience its new of economic expansion within next few years.

Conclusion

            Objective of the research paper to make macroeconomic evaluation for the Australian economy since the last decade of twentieth century. Growth rate found to have large variation in the decade of 1990. Both the highest and lowest growth rate are achieved during this decade. With economic growth approaching to a stable level unemployment declines gradually showing spill-over effect of growth in the labor market. Because of increasing attention of RBA towards attaining a stable price level GDP growth fails to make a sustained increase in the price level. So far as trade balance and exchange rate is concerned there exist an inverse relation between currency exchange and net export. Ease monetary policy has received significant attention of the policymakers Both Federal Reserve and RBA has lowered the overnight bank rate. The slow growth rate of Australia might make some commenters to fear about a likely recession for Australia. Such arguments are weak as the economy is at its recovery phase and likely to enter in a recession.

References

Afonso, G. and Lagos, R., 2015. Trade dynamics in the market for federal funds. Econometrica, 83(1), pp.263-313.

Baker, S.R., Bloom, N. and Davis, S.J., 2016. Measuring economic policy uncertainty. The Quarterly Journal of Economics, 131(4), pp.1593-1636.

Bernanke, B., Antonovics, K. and Frank, R., 2015. Principles of macroeconomics. McGraw-Hill Higher Education.

Guiry, E.J., Staniforth, M., Nehlich, O., Grimes, V., Smith, C., Harpley, B., Noël, S. and Richards, M.P., 2015. Tracing historical animal husbandry, meat trade, and food provisioning: A multi-isotopic approach to the analysis of shipwreck faunal remains from the William Salthouse, Port Phillip, Australia. Journal of Archaeological Science: Reports, 1, pp.21-28.

Hansen, L.P., 2017. Time-Series Econometrics in Macroeconomics and Finance. Journal of Political Economy, 125(6), pp.1774-1782.

Johnson, H.G., 2017. Macroeconomics and monetary theory. Routledge.

Klein, P.A., 2017. Analyzing Modern Business Cycles: Essays Honoring: Essays Honoring. Routledge.

Kleinert, J., Martin, J. and Toubal, F., 2015. The few leading the many: Foreign affiliates and business cycle comovement. American Economic Journal: Macroeconomics, 7(4), pp.134-59.

McCombie, J. and Thirlwall, A.P., 2016. Economic growth and the balance-of-payments constraint. Springer.

Meredith, D., 2015. Why Australia Prospered: The Shifting Sources of Economic Growth, by Ian W. McLean. The English Historical Review, 130(543), pp.485-487.

Murtin, F. and Robin, J.M., 2016. Labor market reforms and unemployment dynamics. Labour Economics.

Plummer, P. and Tonts, M., 2015. Path dependence and the evolution of a patchwork economy: evidence from Western Australia, 1981–2008. Annals of the Association of American Geographers, 105(3), pp.552-566.

Powell, R., Ryan, M. and Lamb, S., 2017. The impact of the mining boom on the dining industry in Western Australia. Australasian Journal of Regional Studies, 23(2), p.243.

Rahman, M.M., Shahbaz, M. and Farooq, A., 2015. Financial development, international trade, and economic growth in Australia: new evidence from multivariate framework analysis. Journal of Asia-Pacific Business, 16(1), pp.21-43.

Rizvi, F., 2017. Asian Diaspora Advantage in the changing Australian economy. In Journal and Proceedings of the Royal Society of New South Wales (Vol. 150, No. 463/464, p. 110). Royal Society of New South Wales.

Stevens, G., 2015. The world economy and Australia. Address by the Governor of the Reserve Bank of Australia to The American Australian Association luncheon, New Y