The present essay intends to analyze on which stage of economic cycle do the Australian economy is at present. The economic cycle relates to the economic fluctuation in trade, production and other economic activities between the periods of contraction and recession. It is also refereed to as business cycle, which has four phases such as- expansion, peak, contraction and trough. Several macroeconomic factors including- GDP, unemployment level, rate of interest, inflation rate, consumer and business confidence helps to determine the present stage of economic cycle in an economy. This study focuses on these macroeconomic factors for determining the stage of economic cycle at which the Australian economy exists. This study will help to provide an overview on how economic climate impact the prospects of a company. Overall, this essay will highlight how the investors make investment for purchasing enterprises technology and other capital products.
There are four stages of economic cycles such as- expansion, contraction, peak and trough. All nations across the globe experience ups and downs in growth of jobs, output, consumers spending and income. The economic cycle mainly begins from trough, passes through recovery phase, followed by expansion and then reaches peak. After reaching peak point, there comes the declining stage of recession. In this way the economic cycle continues with ups and downs (Taussig 2013).
Expansion- In this stage, there is rise in different factors that includes- employment, wages, employment, output and economic growth. Besides this, price of certain factors of production as well as output enhances simultaneously. In this stage, the debtors are in better financial condition for repaying their debts and thus creditors lend fund at high interest rate. Moreover, there is also rise in investment opportunities and thus some funds of an enterprise are used for different investment purposes. This phase continues in an economy until economic conditions becomes favorable.
Peak- Growth in expansion phase slows down and afterwards reach to peak stage. This is highest point in economic cycle when an economy is manufacturing at maximum output or above full employment. In this stage, the economic factors including production, employment, sales becomes high. In this stage, there is gradual decline in demand for goods owing to rise in input prices.
Recession- After the peak stage, there occurs gradual decline in demand for different goods owing to rise in input prices. When decline in demand for goods becomes high, the recessionary stage occurs. In this phase, all economic factors including prices, investment begins to fall. The producers becomes unaware of decline in product demand and thus they continue to manufacture products. In this situation, supply of goods exceeds that of demand for goods (Sloman, Norris and Garrett 2013).
Trough- During this stage, economic activities of the nation decrease below normal level. In this stage, growth rate of specific economy becomes negative. Moreover, in this stage, there occurs huge decrease in national income as well as expenditure. Besides this, the economic output of the nation also becomes low as well as unemployment becomes high.
Figure 1: Phases of Economic Cycle
Source: ()
GDP growth of the Australian economy
During the last ten years, the GDP growth rate of Australia has been fluctuating. The data published by ABS ( Australian Bureau of Statistics) reflects that the growth rate increased during the past two years. Australian economy increased by around 3.40 % in the second quarter of 2018 over the last quarter. The figures of ABS shows that rise in growth pace has been mainly driven by the mining products export. The growth of export has accounted for half increase in this nation’s GDP while government expense has accounted for around third rise in GDP (Hatfield-Dodds et al. 2015). The growth has been also supported by rise in domestic demand as well as foreign trade. In the past ten years, the GDP of Australia grew around 3.4% on an average per year. The GDP growth decelerated to around 1.6% in the year 2009 owing to global financial crisis. This nation showed huge resilience to global crisis with respect to other countries. The economic performance of Australia improved after the recessionary period even though it fluctuated slightly over the last few years (McCombie and Thirlwall 2016). The GDP growth rate trend in Australia is shown in the graph below-
Figure 1: GDP growth rate trends of the Australian economy over the last five years
Source: (tradingeconomics.com 2018)
Sloman, Norris and Garrett (2013) opines that the labor market in Australia is considered at full employment when jobless rate in this economy declines to 5% or lower. According to the latest figures published by ABS (Australian Bureau of Statistics), it has been seen that the unemployment rate trend in Australia is downward over the last five years. Even though the unemployment rate in Australia declined for the last few years, the rate did not fell below 5%. This is because more number of Australians are still entering the labor market in search for job. But still the employment trend increased by about 27000 persons in the year 2018 and thus the growth has been evenly split between part- time and full- time employment with both rising by over 13000 per persons. But it has been seen that the full – time employment enhanced slightly faster than part- time employment over this period. However, the decline in unemployment rate reflects that labor force participation rate has increased over the last few years. While unemployment rare in Australia has remained steady for the past few years, the underemployment rate also declined marginally (Tradingeconomics.com.2018). Over the years, the underutilization rate trend that involves both underemployed as well as unemployment declined by around 0.6% to around 13.8%. The below figure highlights the unemployment trends in Australia over the last five years-
Figure 2: Unemployment trends in Australia over the last five years
Source: (tradingeconomics.com 2018)
According to the latest data published by ABS, it has been seen that the inflation rate in Australia has been stable over the past five years. The underlying inflation of Australia has been below RBA’s set target at 2-3%. As per ABS, it has been observed that the inflation rate was underpinned by high prices for culture, recreation, transport, food and other beverages, which were offset by the lower prices for child care. Taussig (2013) has found out that the housing prices in this nation declined for the past few years. The most significant decline in prices occurred in travel and accommodation, tobacco and automotive fuel. As a result, the Reserve Bank of Australia (RBA) has increased the interest rate owing to fall in consumer price inflation. In addition to this, the continuation of present stance of the monetary policy in this country also aids ti adjust and make progress in reducing inflation rate.
Figure 3: Inflation rate trend in Australia over the last five years
Source: (tradingecionomics.com 2018)
Mankiw (2014) has found that at present, the consumer confidence report depicts confident consumer than it is expected even though confidence is not boosting expenditure intentions. According to the latest figures published by ABS, it has been seen that the consumer confidence in this country has been stable over the past five years. The reduction in income tax rate passed by this nation’s federal government has led to increase in consumer confidence. Several researches have shown that the latest increase in consumers confidence has been driven by rising optimism about this economy. The Westpac Bank and Melbourne institute consumer confidence index has been near around stable over the last five years. The consumer sentiment towards the family finances increases by lesser amount as compared to present finances. The households budget have been under consistent pressure from certain range of factors involving slow wage growth, riding petrol as well as electricity costs and decreasing house prices. Sloman, Norris and Garrett (2013) said that cut in income by federal government has been main factor behind improvement among middle-income households. The improvement in consumer confidence also coincides with higher growth in retail sales of this country over the last few years. The figure below reflects stable growth of consumer confidence in Australia-
Figure 4: consumer confidence in Australia over the past five years
Source: (tradingeconomics.com 2018)
The NAB index of business confidence in Australia has increased over the past five years. In terms of business confidence trend, the confidence has remained highest in mining, which followed by manufacturing sector. Moreover, retail as well as wholesale confidence has remained weakest, thereby reflecting highest weak conditions in sector. Meanwhile, the tool that measures business conditions dipped to 2 points to 12 that is driven by huge decline in employment index. In addition to this, the conditions decreased across most of the sectors with exception to wholesale, transport as well as utilities and construction. The graph below highlights on the trend of business confidence in Australia-
Figure 5: Business confidence in Australia over the past few years
Source: (tradingeconomics.com)
As per recent data, it has been seen that that RBA holds stable rate of interest in the past few years. The RBA has left cash rate below 1.5%, which reflects all time lower where it has been for the past two years. The decision of RBA came amid decreased inflationary pressures and decreased consumer expenditure despite labor market and rise in wage growth (Tinkler and Woods 2013). The fluctuations in inflation rate of this nation has led the RBA to set the interest rate accordingly. The bank also reaffirmed that this economy has been expanding to huge resource exports as well as infrastructure investment. The figure below reflects that the interest rate declined at high rate over the past few years.
Figure 6: Trends in interest rate over the past five years
Source: (tradingeconomics.com 2018)
From the above macroeconomic indicators, it has been seen that the Australian economy is at recovery phase of the economic cycle phase. The researches have reflected that increase in growth of GDP, decline in unemployment rate, fall in inflation rate, stable growth of consumer and business confidence and low trend of interest rate led this nation into recovery phase. However, it has been predicted by several economists that Australia will move into expansion phase in the upcoming years.
Conclusion
From the above discussion, it can be conclusion that the Australian economy has improved after the recessionary period (2008-2009). After this period, the economy again dipped into low growth during the year 2016 but the growth trend again increased after 2016. At present, the Australian economy has been in recovery phase and is moving towards expansion stage of the economic cycle.
References
Hatfield-Dodds, S., Schandl, H., Adams, P.D., Baynes, T.M., Brinsmead, T.S., Bryan, B.A., Chiew, F.H., Graham, P.W., Grundy, M., Harwood, T. and McCallum, R., 2015. Australia is ‘free to choose’economic growth and falling environmental pressures. Nature, 527(7576), p.49.
Mankiw, N.G., 2014. Principles of macroeconomics. Cengage Learning.
McCombie, J. and Thirlwall, A.P., 2016. Economic growth and the balance-of-payments constraint. Springer.
Sloman, J., Norris, K. and Garrett, D., 2013. Principles of economics. Pearson Higher Education AU.
Taussig, F.W., 2013. Principles of economics (Vol. 2). Cosimo, Inc..
Tinkler, S. and Woods, J., 2013. The readability of principles of macroeconomics textbooks. The Journal of Economic Education, 44(2), pp.178-191.
Tradingeconomics.com. (2018). Australia Business Confidence | 1997-2018 | Data | Chart | Calendar. [online] Available at: https://tradingeconomics.com/australia/business-confidence [Accessed 19 Nov. 2018].
Tradingeconomics.com. (2018). Australia Consumer Confidence | 1974-2018 | Data | Chart | Calendar. [online] Available at: https://tradingeconomics.com/australia/consumer-confidence [Accessed 19 Nov. 2018].
Tradingeconomics.com. (2018). Australia GDP Growth Rate | 1959-2018 | Data | Chart | Calendar | Forecast. [online] Available at: https://tradingeconomics.com/australia/gdp-growth [Accessed 19 Nov. 2018].
Tradingeconomics.com. (2018). Australia Inflation Rate | 1951-2018 | Data | Chart | Calendar | Forecast. [online] Available at: https://tradingeconomics.com/australia/inflation-cpi [Accessed 19 Nov. 2018].
Tradingeconomics.com. (2018). Australia Unemployment Rate | 1978-2018 | Data | Chart | Calendar. [online] Available at: https://tradingeconomics.com/australia/unemployment-rate [Accessed 19 Nov. 2018].
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