Macroeconomic Performance Analysis Of Australia

GDP Growth, Inflation, and Unemployment

Discuss about the Making of Contemporary Australian Monetary Policy.

Aggregate performance of an economy depends on the performance of different indicators at macro level. Aggregate output is measured with gross domestic product. A more precise measure of output is real GDP which represents values of all the marketed goods and services in domination of a fixed base year price (Johnson, 2017). Economic growth measured with a growth of GDP brings prosperity for economy and influences other indicators as well. Australia through its rapid progress within a relatively small period of time has made its own separate position in the world economy. Mining industry supported by huge stock of natural resources provides a great support to the Australian economy (Fenna, 2015). Resembling most other developed nation, Australia is largely a service oriented economy. Trade is an important contributor of Australian GDP. The international demand of a commodity depends on rate of exchange between the nation and therefore, exchange rate is one important attribute of trade balance. Fund rate as determined by Federal Reserve influences cash rate decision of RBA. Through analysis of macroeconomic performance of past year, the report aims to provide an insight about future performance.

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

Summary Statistics
Real GDP growth rate Save Time On Research and Writing Hire a Pro to Write You a 100% Plagiarism-Free Paper. Get My Paper	Inflation	Unemployment
Mean	3.10	Mean	2.68	Mean	6.73
Standard Error	0.23	Standard Error	0.28	Standard Error	0.36
Median	3.53	Median	2.49	Median	6.10
Mode	#N/A	Mode	#N/A	Mode	6.90
Standard Deviation	1.21	Standard Deviation	1.46	Standard Deviation	1.89
Sample Variance	1.46	Sample Variance	2.14	Sample Variance	3.58
Kurtosis	1.74	Kurtosis	2.47	Kurtosis	-0.18
Skewness	-1.21	Skewness	1.15	Skewness	0.88
Range	5.38	Range	7.02	Range	6.70
Minimum	-0.38	Minimum	0.25	Minimum	4.20
Maximum	5.01	Maximum	7.27	Maximum	10.90
Sum	83.62	Sum	72.33	Sum	181.60
Count	27	Count	27	Count	27

The average growth rate in the last 27 years (1990-2016) is 3.10 with an average inflation of 2.68 percent and that of average unemployment rate is 6.73. Both the highest and lowest growth rate is achieved in the decade of 1990s.  The lowest documented growth rate is -0.38 percent while the highest growth rate in 5.01 occurred in the respective years of 1991 and 1999. The highest inflation rate is 7.27 prevailed in 1990. The lowest inflation rate is also recorded in 1990s. The lowest rate of inflation of 0.25 percent was achieved in 1997 (Eggoh and Khan, 2014). The economy faced maximum problem of unemployment during 1993 with unemployment reached to the highest level of 10.90.  The lowest rate of unemployment that the economy achieved ever is 4.20.

Table 2: Correlation between GDP growth and inflation

	Real GDP growth rate	Inflation
Real GDP growth rate	1
Inflation	-0.019661645	1

The correlation matrix shows a very week association between inflation and GDP growth rate. The estimated correlation is -0.02. This indicates real GDP growth and inflation rate likely to have an adverse influence on each other.

Figure 1: Real GDP growth and inflation

Real GDP is an inflation adjusted measure of GDP. Higher the inflation lower is the value of output at constant prices and hence, lower is the real GDP and vice versa. The Trend above shows real GDP of Australia has increased overtime while the price level has been stabilized. Monetary policy of RBA plays an important role in stabilizing the price level (Carvalho 2015).

Phases of Business Cycle in Australia

Table 3: Correlation between GDP growth and unemployment

	Real GDP growth rate	Unemployment
Real GDP growth rate	1
Unemployment	-0.125528172	1

Real GDP growth is inversely associated with unemployment rate. The estimated correlation is -0.13. This implies higher the real GDP growth lower is the unemployment rate and vice versa.

Figure 2:  Real GDP and rate of Unemployment

The relation obtained from correlation matrix is further supported from the trend movement of GDP and unemployment. The GDP growth rate increases gradually or remain stable around a certain level while the unemployment rate declines (Nielsen, 2017). This helps to narrow down the gap between unemployment rate and GDP growth implying GDP growth is Australia has a favorable impact on labor market performance.

The theory of business cycle provides useful insights to understand volatility in economic growth rate. According to this theory, economic growth of different nations faces four phases of economic growth. Economic expansion is associated with an increase in output, gain in price, level, growth of employment and an overall prosperity of the entire economy. Continuous expansion led the economy to a point where it achieves the highest potential output. This is known as peak (Mankiw, 2014). The economic expansion cannot sustain for a very long period of time. Output starts to fall lead to a recession. Sustained recession moves the economy towards economic trough.

Phases of business cycle in context of Australian economy can be analyzed through the examining its historical growth rates (Rees, Smith and Hall, 2016). The decade of 1990 began with an economic recession with a drastic fall in output. Economic growth during 1991 is accounted as -0.38 percent.  The economy gradually expanded thereafter maintaining an almost stable growth rate. The last year of the decade experienced an economic peak at the end of the decade. Real GDP growth rate in 1999 reached to the decadal highest rate of 5.01. As explained by the theory, the peak growth rate cannot be sustained for a very long period the beginning of twenty first century experienced a slow growth rate (Benos and Zotou, 2014). Economic growth gradually accelerated reaching to 4.15 percent in 2004. The growth rate of 1.81 percent in 2009 marked an economic trough. Growth gradually recovered following a series of internal and global economic expansion. Currently the economy is running with comparatively slow growth rate, growth rate lower than decadal average.

Net export is one of the major influencing factor of GDP. A surplus in trade account where export exceeds import helps to expand output and economic growth (Blanchard, 2018). In the GDP of Australia, trade contributes to a significant portion of GDP. In 2008, trade accounted for nearly 23 percent of GDP. Recently the share though has reduced slightly but it remains as high as 21 percent. Australia has a competitive advantage in resource and service industry over rest of the world. Among the exported goods, the primary export items include coal, Iron Ores and concentrates, gold, crude petroleum, Aluminum ores and wheat. The service exports of Australia include education related travel service, professional service, financial service and business travel service (Kenyon and van der Eng 2017). Export from Australia enjoy a wide market in countries like United States, China, Japan, India, South Korea, United Kingdom, Singapore and Taiwan. Australia imports automobile parts, refined petroleum, computers and medicaments from countries like China, Unites States, Singapore, Germany and Japan.

Trade Performance of Australia

United States is one vital export and import partner of Australia. Australia mainly export meat, optics and medical equipment, ores, wine and precious metals and others. US exports to Australia include machinery, vehicles, aircrafts, vehicles and agricultural products. The volume of export and import between US and Australia depends on the price of Australian dollar relative to US dollar. A higher value of Australian dollar makes exportable expensive and hence lowers the export demand. The lower relative value of Australia dollar on the other hand helps to increase export (Choudhri and Hakura, 2015). The table below provides summary statistics of net export and exchange rate between Australia and USA.

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

Net Export	Exchange rate
Mean	20157093443	Mean	1.35
Standard Error	6388333393	Standard Error	0.05
Median	30502189078	Median	1.33
Mode	#N/A	Mode	#N/A
Standard Deviation	33194754037	Standard Deviation	0.24
Sample Variance	1.10189E+21	Sample Variance	0.06
Kurtosis	-0.710436358	Kurtosis	0.66
Skewness	-0.59409697	Skewness	0.69
Range	1.17904E+11	Range	0.97
Minimum	-51198100517	Minimum	0.97
Maximum	66705816333	Maximum	1.93
Sum	5.44242E+11	Sum	36.44
Count	27	Count	27

Average trade balance of Australia for the chosen period is 20157093443 and the average price of Australian dollar with respect to US dollar is 1.34945. The country enjoys maximum trade surplus of 66705816333 in 2001. This is associated with a highest value of Australian dollar against US dollar. The corresponding exchange rate is obtained as 1.93. The lowest trade balance is in the year 2012 associated with the lowest exchange rate of 0.97.

Table 5: Correlation between net export and real exchange rate

	Net Export	Exchange rate
Net Export	1
Exchange rate	0.854644021	1

The estimated correlation between exchange rate and net export is 0.85. The correlation is close to 1 indicating a strong positive relation between exchange rate and net export.  The graph below shows movement of exchange rate and net export over the chosen period from 1990 to 2016.

As obtained from summary statistics and trend movement of exchange rate and trend export there is positive association between net export and exchange rate. An increase in exchange rate increases export competitiveness of Australia lowering relative price export and hence, leads to an increase in net export (Schautschick and Greenhalgh, 2016). Decline in exchange rate lowers net export through currency appreciation.  After the global financial crisis, the unstable economic condition and downturn in economic activity lowers the value of US dollar with respect other currencies. The appreciation of Australian dollar led to large trade deficit.

Cash rate and fund rates are monetary policy instrument used by central bank of Australia and USA. Using these rates central banks influence money supply in the economy. The overnight rate charged by the federal government on the money lend to commercial banks and other financial institution is called the fund rate (Hansen, 2017). Reserve Bank of Australia alters the cash rate to influence ending in the economy. RBA alters cash rates to stabilize inflation. The decision of RBA to alter cash rate is influenced by the Fed’s decision of fund rate. When Fed reduces fund rate then it reflects a weak position of the US economy. Interest rate has a direct relation with exchange rate. A lower fund rate reduces value of US dollar (Hamilton et al., 2015). This might adversely affect the trade balance of Australia by raising relative price of Australian dollar. A counteractive measure then can be taken by RBA by lowering cash rate.

Correlation Analysis of Net Export and Real Exchange Rate

Table 6: Summary Statistics of fund rate and cash rate

Summary Statistics
cash rate	Fund rate
Mean	5.383704	Mean	3.042315
Standard Error	0.493512	Standard Error	0.472257
Median	5.125	Median	3.213333
Mode	6.5	Mode	#N/A
Standard Deviation	2.564363	Standard Deviation	2.453919
Sample Variance	6.575957	Sample Variance	6.02172
Kurtosis	6.626178	Kurtosis	-1.26609
Skewness	1.962113	Skewness	0.160086
Range	13.33333	Range	8.01
Minimum	1.5	Minimum	0.089167
Maximum	14.83333	Maximum	8.099167
Sum	145.36	Sum	82.1425
Count	27	Count	27

As reflected from the summary statistics cash rate and fund rates were at the highest level during 1990. The cash rate in 1990 was 14.83. The fund rate in that year was 8.10. Cash rate has been lowered to 1.50 in 2016. The lowest fun rate was in 2014 with fund rate being only 0.09. From 1990 to 2016, the cash rate averaged around 5.38. The average fund rate in the period is 3.04.

Table 7: Correlation between cash rate and fund rate

	cash rate	Fund rate
cash rate	1
Fund rate	0.758976462	1

The correlation between cash rate and fund rate is estimated as 0.76. This implies a positive association between cash rate and fund rate.

There is a declining trend in both fund rate and cash rate. Throughout the entire period, cash rate is higher than that of the fund rate. Fund rate declined at a much faster pace than cash rate after the financial crisis (Tong,2017). Fund rate declined sharply from 5.02 in 2007 to 1.93 in 2008 and further to 0.16 in 2009. The relatively strong financial position of the nation kept the nation relatively less affected. RBA lowered the cash rate from 6.13 in 2008 to 3.35 in 2009.  During 2013-14, cash rate remained stable at 2.63 while fund rate lowered to a historically low level of 0.09. Regaining strength of the economy, fund rates are revised upward to 0.13 and 0.40 respectively.

From the summary statistics of major macro variables like real GDP growth, inflation and unemployment it has observed that the economy though had maintained a stable growth pace but in last few years it has accounted a decline in the recent growth rate due to shocks in domestic and external economies. End of mining boom because of a slow growth of China’s economy, housing bubble in the construction industry, slow wage growth and decline in private consumption explain the slower than expected growth rate of Australia. Despite this fact, the outlook of the economy remains positive. Investment outside tradition resource and construction sector has been driven out to other sectors of the economy (Chen et al., 2015). The recent trend of growing non-mining investment is projected to continue. Increase in public investment in machinery and equipment is likely bring a new phase of industrial growth. Currently consumption is growing at a rate that is lower than the average rate before the outburst of financial crisis. The outlook of wage recovery will support income growth of people along with a growth in consumption. Decline in the export of iron ore and minerals is likely to offset from the export expansion of liquefied natural gas. The dwelling investment is projected to increase. Consistent with GDP growth the economy will experience an employment growth, which can further contribute to a higher growth rate. The Australian economy is thus projected to recover its slow growth phase and will enter in a recession soon.

Conclusion

The report narrates economic performance of Australia at the macro level. The analysis finds economic growth has a positive effect on employment generation and therefore reduces price level. Price level on the other hand is more of subject to monetary policy of RBA than of GDP growth. The strength of currency has an adverse effect on trade balance. Demand for exportable depend of value of AUD with respect to other currencies. A lower value of AUD means higher export and so is the trade balance. Reverse is the cash with a relatively strong currency value. RBA overtime has taken a policy of monetary easing through continuously lowering its cash rate. The policy is consistent with similar kind of policy on part of USA. The report finds out a relatively resilient nature of Australian economy and hence supports optimistic view about future Australian economy.

Reference list

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