Different indicative measures of economic performance of a nation are GDP growth, inflation, unemployment, interest rate, export and import. Evaluation of economic performance thus requires analysis of economic performance in each of this indicator (Fontana and Setterfield, 2016). Australia is a small-developed nation with high dependency on service sector especially financial services. Like several other developed nation Australia also has experienced dynamic fluctuation in the economy. The interest factor about austral is that, it has quickly absorbed the economic shocks and successfully balanced the stable growth path. The paper tries to find insights about macroeconomic performance of Australia for the last few years specifically from 1990 to 2016. The analysis also includes the economic relation between Australia and USA.
Among different interconnected macro variables, relation between GDP growth, inflation and unemployment is widely discussed. Unemployment and price level in a nation move along with the growth in real GDP. A rising GDP growth implies a favorable condition for employment growth pushing unemployment to a low level (Terra, 2015). Growth in real GDP by boosting economic activity pushes up the price level. Very high price level however has an adverse effect on growth by a lower output resulted from increasing cost of production.
Figure 1: Unemployment and GDP growth
Figure 1 represents the unemployment trend in Australia along with trend in GDP growth rate. The unemployment rate except in the last few years has a more or less declining trend. GDP growth on the other hand has only a moderate growth rate with a sudden fall in growth during years of recession. The decline in unemployment along with a growth in GDP reduces the gap between rate of growth and that of unemployment. This shows a positive influence of economic growth on labor market performance. The economic growth in Australia thus expands opportunities for laborers (Hartwell, 2017). One major driver of Australian economic growth for several years is the mining sector. The sector being highly labor intensive, during mining boom of Australian many people get opportunities to get employed. With a decline in growth rate unemployment increases as reflected from widening gap between unemployment and growth rate since 2013.
Figure 2: GDP growth and trend in inflation
Unlike unemployment, no steady relation is observed between economic growth and that of inflation. The price level fluctuates more than GDP growth indicating there are factors other than GDP growth having significant influence on price level (Thorpe and Leitão, 2014). The price level in recent years is much stable as compared to that in early 1990s. For some years, both growth rate and inflation increases simultaneously showing signs of economic expansion. While in others the growth rates are associated with a low level price indicating an inverse relation. One factor explaining existence of economic growth along with a slow or stable movement of price level is inflation targeting policy of Reserve Bank of Australia, targets to maintain a price level of 2 percent (Svensson, 2015).
Figure 3: Fluctuation in economic growth and business cycle
The economic growth of a nation is subject to fluctuation resulted from shock in domestic and external economy. The business cycle theory captures the fluctuation in economy growth rate. an economy generally undergoes through four phases of business cycle – expansion, economic boom, recession and finally trough. Among these economic boom and trough are the two extreme phase when the economy records highest and lowest growth point respectively. Expansion implies expansion of output, employment and other economic activity (Belongia and Ireland, 2016.). During recession there is a general downward trend in economic activity. Every economy passes through these four phases of business cycle. No exception is observed for Australia. The time length of business cycle phases however varies across different economies depending on the internal structure of the economy.
The period of early 1990s showed a clear evidence of economic recession. Growth rate in the early 1991 was negative. Economic expansion began since 1992 with growth rate gradually started increasing. Growth rate peaked to 5.01 percent in 1999 (Kent, 2014). Growth gradually, In between these years, there was a moderate recession in 1995 with growth rate fell to 3.89. Growth rate expanded from 1196 onwards and finally reached to the peak level in 1999. In the beginning if twenty first century growth rate began to decline with a sign of recovery in 2004, the economy grew at a rate of 4.15 percent. Growth slightly slowed down in the three years and backed to a rate of 3.75 in 2007. Economic trough gain evidenced in 2009 with a growth rate of only 1.81 percent (Word Bank, 2018). Expansion began in 2010 and in 2012 growth recovered to 3.63 percent. From 2013 onwards, economy began to grew at a relatively slow rate with an average growth rate of 2.5%.
Among four primary components of GDP, net export is one major component. It is an estimate of net gain from trade and obtained as total export less total import. In context of Australian economy, the external sector plays an important role in determining GDP (DFAT, 2018). Until the decade of 1960s, trade relation of Australia was mostly limited to United State and Britain. With passes of time and development of different industries and service sectors Australia has gained a competitive edge in the global market leading to expansion of trade relation with several nations across the world. Australia enjoys a comparative advantage over wide variety of goods and services (Argy and Nevile, 2016). The competitive advantage of Australia varied from high quality technology intensive product to high quality wine and in food processing. Service trade of Australia include services like education and tourism, financial and professional services.
Iron ores and concentrates, coal, natural gas, education related travel service and personal travel service excluding education are the top five exports of Australia. The goods and services are exported to different markets of China, Japan, United State, Republic of Korea and India. Australia’s importable include personal travel service, which excludes education, passengers’ vehicles; refine petroleum, freight service and telecom equipment and part (Gilpin, 2016). The importable are obtained from China, United State, Japan, Republic of Korea and Thailand.
The demand for export, import, and hence, balance in trade depends on the relative value of currency termed as the exchange rate. It measures how much home currency needs to be exchanged for one unit of foreign currency. High value of home currency is though favorable for import but hurts trade balance by lowering is export demand. In contrast, low value of currency indicates a weak position of the nation but is favorable for export and trade balance (Pagan and Wilcox, 2015). The value of Australian dollar especially against US dollar has a considerable impact on Australia’s balance of trade. Devaluation of Australian dollar implies a relatively a lower price for exported goods from Australia. This increases export demand of Australian export. The cheaper export and relatively expensive import improves trade balance. Currency appreciation has an opposite effect on net export.
The figure below shows pairwise movement of real exchange rate between United State and Australia and that of the net export of Australia.
Figure 4: Exchange rate and net export
The graph above shows that exchange rate and net export moved in the same direction. That mean a rise in exchange rate is associated with a rise in net export and vice versa. This is because an increase in exchange rate implies devaluation of Australian dollar. This increases export competitiveness of Australia over United States, Canada and other countries. After enjoying a trade surplus from 1990 to 2007, the country had experienced a trade deficit (Halligan, 2017). The exchange rate in 2008, declined from 1.20 to1.19. In the next year exchange rate though increased slightly to but trade, balance remained negative mainly due to a decline in global demand following hit of global financial crisis in 2008. AUD appreciated in 2011 and 2012 aggravating trade balance further. As US dollar gained value in the last two-three years net export increases.
The interest rate that Reserve Bank of Australia charges on the overnight loans given to the commercial banks is called cash rate. The same charged by Federal Reserves on overnight loans to financial institution is called fund rate. The central banks of respective nations use these rates to control and money supply in the economy. When there is a need to provide growth stimulus to the economy, expansionary monetary policy is undertaken through lowering the bank rate. A lower bank rate induces investment. The money market is tightened in order to stabilize price level. In view of, international relationship between USA and Australia, monetary policy in one nation affects that of other nation. For example, if Fed reduces fund rate then this lowers value of Australian dollar (Blanchard, Cerutti and Summers, 2015). The string currency though indicates a relatively strong international position of Australia but hurts the export through appreciation of currency. In order to restore trade balance Australia then might choose to devaluate currency by reducing the cash rate. An increase in fund rate on the other hand is favorable for Australia.
Figure 5: Trend in fund rate and cash rate
Figure 5 presents historical movement of cash rate and fund rate from 1990 to 2016. Overall there is a declining trend for both fund rate and cash rate indicating an expansionary monetary policy on part of both the government. In 1990, cash rate set the cash rate at 14.83 (Fischer, 2016). The effective fund rate was 8.10. Followed by the recessionary hit, RBA in 1991 reduced the fund rate to 10.00. In this year the fund rate was 5.69. Fed made downward revision in fund rate for the next two consecutive years. The rate had lowered to 3.52 and 3.02 (FRED, 2018). Cash rate also followed the same trend, which lowered to 6.58 and 5.00. The same trend has followed throughout the entire period reflecting close association of the two rates. However, in order to recover the effect of global financial crisis Fed made a drastic downward revision of the fund rate. Fund rate reduced sharply from 5.02 in 2007 to 1.93 in 2008 and to 0.16 in 2009. Cash rate though reduced during this time not as intensively as fund rate did. The cash rate in 2014 was 2.63 as against a fund rate of 0.09 (Guttmann, 2016). The fund rate increased slightly in 2015 and 2016 while RBA continued to decline cash rate to 2.13 in 2015 and 1.50 in 2016. The average fund rate for the chosen time period is 3,04 while cash rate averaged nearly around 5.38.
In the next couple of years, the economy might experience an expansion. The relatively slow growth from 2013 is likely to be ended with given economic resilient of the nation (OECD, 2018). The diversified nature of Australian economy will help it overcome recessionary pressure arising from China’s slow down and worsening terms of trade. The weak growth in private consumption will be offset by growing business investment and boost in public demand. This will help to grow domestic demand which will contribute expansion of economic output. The GDP growth rate is forecasted to be strengthened in the upcoming years. The depressed demand of mining and construction dragged the economic growth of Australia. The mining recession has come to an end. Along with this, the policy of monetary easing will help the economy to get over the phase of business cycle slowdown in terms of income and consumption growth and increases in investment in non-resource sector (RBA, 2018). Export might face a decline due to disruption at some major key ports and adverse effect of unfavorable weather condition on rural export. The positive outlook for export derived from steady growth in the production and export of liquefied natural gas. The economy thus is forecasted to maintain history of its stable growth pace.
Conclusion
The analysis so far has been made indicates that for Australian economy, GDP growth and unemployment has a fairly opposite relation. For price level, though GDP growth initially surges price level, but gradually the effect has reduced because of anti-inflationary policy undertaken by RBA. In the economy, presence of business cycle has evidenced with phases of recession and expansion. Trade balance of Australia is subject to variation in the exchange rate between Australia and USA. So far as monetary policy is concerned, USA and Australia both has provided monetary policy stimulus as a strategy of economy growth. Economic slowdown of Australia is likely to be recovered within a next few years moving it again to the path of economic expansion.
References
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Reserve Bank of Australia. (2018). Cash Rate | RBA. [online] Available at: <https://www.rba.gov.au/statistics/cash-rate/ > [Accessed 19 May 2018].
Fred.stlouisfed.org. 2018. Effective Federal Funds Rate. [online] Available at: <https://fred.stlouisfed.org/series/FEDFUNDS> [Accessed 21 May 2018].
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