Macroeconomic Performance And Outlook Of Australian Economy

Growth performance of Australia along with inflation and unemployment

Australia having a mixed market economy is in the list fastest developed nation of the world. The nation has made rapid progress by exploring its huge reserves of minerals. Production and export of minerals fueled economic growth of Australia. The nation however is dominated by its service sector (Azad et al., 2014). Financial, travel and tourism and professional services of Australia are of particular interest. Economic performance of a nation is attributed from performance of the economy in several aspects. Some important aspects in performance evaluation of a nation are GDP, magnitude of unemployment, inflation, trade balance, exchange rate and net export. Change in any one of the variables has a direct or indirect effect on another (Fontana and Setterfield, 2016). Objective of current research report is portrait macro level performance of Australian economy from 1990 to 2016. In the process of analysis relation between GDO growth, inflation and unemployment has been analyzed. The economic interdependence between USA and Australia has explored with movement in fund rate and cash rate. Lastly economic prediction has made about the future state of Australian economy.

Growth performance of Australia along with inflation and unemployment

Real GDP is an indicative measure of total produced output in terms of a fixed base year prices. As real GDP takes into consideration price of a fixed base year it by providing a price adjusted measure of output signifies actual performance of the economy. Expansion and contraction of real GDP has association with other related macroeconomic variable (Ravenhill, 2017). Unemployment and inflation are the two such variable that likely to change as GDP changes. Unemployment is a symbolic measure of labor market condition. Growth is GDP indicate a growth in overall output through more productive activities. As labor is the primary input in the production process this generally increases demand for labor causing a low rate of unemployment. Change in the price of consumption basket is captured by the rate of inflation. A growth in real GDP implies high labor demand which by leads to a growth of wages and hence, increases inflation through demand expansion. GDP growth of a nation thus increases the price level. However, because of government policy intervention high growth might be associated with a stable price level indicating a negative influence of GDP growth and price level (Goodwin et al., 2015).

The proposed theoretical relation between real GDP and that of unemployment and inflation is empirically tested by collecting data on GDP growth, inflation and unemployment. From the collected data summary statistics of real GDP, inflation and unemployment is obtained as follows.

Table 1: Descriptive statistics of real GDP, unemployment and inflation

Table 1: Descriptive statistics of real GDP, unemployment and inflation

GDP		UMEMPLOYEMENT RATE	INFLATION RATE
Mean	0.758333333	Mean	6.722887577	Mean	0.642159
Standard Error	0.059202105	Standard Error	0.181248977	Standard Error	0.056322
Median	0.7	Median	6.162561267	Median	0.589628
Mode	0.7	Mode	#N/A	Mode	0
Standard Deviation	0.615246323	Standard Deviation	1.883594617	Standard Deviation	0.585311
Sample Variance	0.378528037	Sample Variance	3.547928681	Sample Variance	0.342589
Kurtosis	2.027693677	Kurtosis	-0.272419594	Kurtosis	8.220731
Skewness	0.257492053	Skewness	0.857846691	Skewness	1.902258
Range	4.3	Range	7.061251633	Range	4.294584
Minimum	-1.3	Minimum	4.084568833	Minimum	-0.44843
Maximum	3	Maximum	11.14582047	Maximum	3.846154
Sum	81.9	Sum	726.0718583	Sum	69.35315
Count	108	Count	108	Count	108

The measure of quarterly GDP growth shows that Australia maintains an average GDP growth of 0.76 percent (Rickard, 2018). The fastest growth pace of the economy is during the second quarter of 1997 with a seasonally adjusted growth rate of 3 percent. The lowest ever growth rate is in the first quarter of 1991.  The economy during this time recorded a significant slowdown with output fell by 1.30 percent. Unemployment rate of Australia is averaged around 6.72%. The highest ever unemployment rate is 11. 15% during fourth quarter of 1992. In the first quarter of 2008, labor market constituted a strong performance following the lowest unemployment rate of 4.08%.  The average inflation rate is quite lower in Australia as compared to standard of most developed nations (Hatfield-Dodd et al., 2015). The mean inflation rate is 0.64 percent. Average price level reached to its lowest level in the third quarter of 1997. The associated growth rate was also very low with growth being only 0.10 percent. Price level rose significantly in the first quarter of 2000 with a rate of inflation of 3.84 percent.

Statistically the relation between GDP growth and inflation and unemployment can be understood from the correlation matrix showing relation between GDP and the two targeted variables.

Table 2: Correlation between real GDP and unemployment rate

	DATE	RGDP	UMEMPLOYEMENT RATE
DATE	1
RGDP	-0.0325	1
UMEMPLOYEMENT RATE	-0.77486	0.092173	1

The estimated correlation between unemployment rate and real GDP is 0.09. Positive value of correlation symbolizes a positive effect of real GDP on unemployment rate. The obtained relation is not much strong as indicated from a very low value of correlation.

The obtained relationship can further be varied by using time series graph capturing simultaneous movement of unemployment and real GDP.

Figure 1: Real GDP and unemployment rate

(ABS, 2018)

The seasonally adjusted GDP growth rate varies between 0 to 2 percent.  The unemployment rate on the other hand recorded a steady decline with gradually approaching towards the GDP growth. Growth of GDP though by expanding output helps to reduce unemployment rate but growth is not the only factor contributing to a lower unemployment rate (Thorpe and Leitão, 2014).  The highest level of unemployment in the fourth quarter of 1992 was associated with an above average growth rate of 2.10 percent. High growth rate thus failed to generate employment for majority if people in the labor market. The unemployment lowered significantly in 2008 despite a growth rate on only 1 percent.

Table 2: Correlation between real GDP and unemployment rate

Table 3: Correlation between real GDP and inflation

	DATE	RGDP	INFLATION RATE
DATE	1
RGDP	-0.032500971	1
INFLATION RATE	-0.068537555	-0.159514126	1

 In the above table real GDP again showed an inverse relation with inflation rate. The estimated correlation is -0.16. The rise in real GDP thus can lead to a fall in the price level. The time series graph of inflation and real GDP is presented below

 

Figure 2: Real GDP and inflation rate

(ABS, 2018)

The graph indicates a fluctuating trend in the movement of price level. The price level however stabilized gradually and finally settled between 0 to 1 percent. The economic theory suggests that growth likely have a positive influence on inflation. With economic growth, there is an increase in average income. This by in increasing purchasing power creates demand-pull inflation. However, exception occurred during global recession. Both GDP and price level lowered during recession. The two big recession occurred in the chosen time frame. One is Asian financial crisis in 1997 and other is global financial crisis in 2008. Asian financial crisis broke out in 1997. The sudden crisis in mainly five most important Asian nations (Philippines, Malaysia, Thailand, South Korea and Indonesia) affected the Australian economy. Both the GDP growth an inflation significantly lowered during this time. The GDP growth alone fail to uplift the price level. The price level recovered with improvement in the exchange rate due to reinvestment of foreign funds from Asian Market to Australian market. The similar trend is also observed during global financial crisis of 2008 (Harvie, C. and Van Hoa, T., 2016).  The movement of price level in Australia is more influenced by the monetary policy of RBA achieving a targeted inflation is one primary goal of central bank (Saunders, Wong and Bradbury, 2016).  The negative inflation of -0.45 is associated with a low growth rate of 0.10. The high inflation of 3.84 is also associated with a low growth of 0.20.  This indicates inflation rate is more to do with monetary policy than that with GDP growth.

Business Cycle in Australia

Australia passed through different phases of business cycle. The business cycle phases are evidenced from upswing and downswing in economic growth rate. The upswings of economic growth indicate phases of economic recession which moves the economy towards an economic boom. The downswings are period of economic recession characterized by a slow growth of economic activity.  Recessions in the Australian economy are relatively short lived (Bertay, Demirgüç-Kunt and Huizinga, 2015). The economy experienced a recession in late 1990 with accounted negative growth rate. The economy set out to an expansionary phase until experiencing a business cycle trough with growth rate of -0.40%. Again economy expands for a long period and maintained a stable growth rate. In the fourth quarter of 2008, again the economy realized a recessionary pressure and economic trough occurred with a growth rate -0.50. After that the economy recovered slowly. In between the recent years, there was two recessions, one in 2011 and other in third quarter of 2016. Presently, Australia is in a phase of economic recovery and soon enter to economic expansion.

Relation between net exports and real exchange rates

Association between net export and exchange rate

The net export component of GDP represents the overall outlook of the external sector. Net export is obtained as a difference between export and import. Trade account runs with a surplus when export earnings of the nation exceeds cost of necessary import. Participating in trade is beneficial for economy growth when nation able to earn a higher return from its export and this is sufficient to pay for import (Kramer, 2016). In a globalized world, nations are interconnected with each other with a trade or investment relation. Australia has no exception in this regard. United State and Britain are the oldest trade partners of Australia. With gradual progress of Australia in a wide range goods and service, trade volume increases rapidly and export expands to market of developed and developing nations. Australia earns huge foreign reserve from exporting goods like iron ore, crude petroleum, iron ore, gold and agricultural products like meat and wheat (Mascitelli and Wilson, 2018). Australia depends on other nation for packaged medicament, refined petroleum, Automobile parts and others.

Since the beginning of economic development Australia and USA shared a good trade relation and provided support to each other. The free trade agreement between the two nation further widened their trade relation.  a large volume of goods and services ate exchange between these two nation. the price pf exportable and importable in the global market is determined in terms of relative value of currencies of countries engaged in trade. A currency is depreciated when a higher amount of time currency needs to exchange or foreign currency.  This indicates a relatively low value of currency and hence a higher export demand (Aikman, Haldane and Nelson, 2015). High export demand increases export earnings and therefore, an improvement of trade balance. Currency depreciation on the other hand means country needs to give reactively smaller sum of home currency against foreign currency.  This makes import cheaper and export expensive and therefore, worsening trade balance (Mankiw, 2014).

Table 4: Descriptive statistics of net export and exchange rate

NET EXPORT	EXCHANGE RATE
Mean	-2499.28	Mean	0.763936111
Standard Error	331.4823	Standard Error	0.013019657
Median	-2499.5	Median	0.756816667
Mode	#N/A	Mode	0.7441
Standard Deviation	3444.866	Standard Deviation	0.135304247
Sample Variance	11867099	Sample Variance	0.018307239
Kurtosis	-0.00607	Kurtosis	-0.134561048
Skewness	-0.13247	Skewness	0.344643609
Range	17982	Range	0.5695
Minimum	-11974	Minimum	0.508766667
Maximum	6008	Maximum	1.078266667
Sum	-269922	Sum	82.5051
Count	108	Count	108

Data on net export of Australia are collected along with corresponding exchange rate between USA and Australia. The exchange rates represent value of 1 Australian dollar against US dollar. Thus increase in value of the exchange rate indicates appreciation of Australian dollar while a decline in the value is indication of currency depreciation. From the summary statistics, the average trade balance is estimated as -2499.28 that means a deficit in the trade balance. The highest trade balance is 6008 obtained in 2016 while the largest trade deficit is in 2015 with amount of deficit being 11974. The average value of Australian dollar is 0.76. The lowest exchange value of 0.51 is associated with a trade surplus of 1711. The highest exchange ratio is 1.07.

Relation between Australia’s Cash rates and the Federal Reserve Fund’s rates

Table 5: Correlation between net export and exchange rate

	NET EXPORT	EXCHANGE RATE
NET EXPORT	1
EXCHANGE RATE	-0.0480101	1

Figure 3: Trend movement of net export and exchange rate

(ABS, 2018)

A negative estimated correlation is obtained between net export and USD/AUD exchange rate.  This indicates as Australian dollar appreciates net export fall and increases with depreciation of Australian dollar. The same pattern of relation has also been suggested from the time series graph of exchange and net export

Fund rate and cash rate

Several factors are at play in the monetary policy decision of central bank. In addition to domestic economic condition central bank needs to consider the possible effect of ease or tight monetary policy of other nations having significant influence on the domestic economy (Laubach and Williams, 2016).  This is the reason why movement of fund rate might have an impact of cash rate. Both are overnight bank rates that commercial banks are liable to pay. When Fed increase fund rate, then it indicates a relatively strong position of the nation. This however is not matter of much concern.  A lower fund rate, on the other hand affects Australian economy through channel of currency appreciation. As a result, counteractive policy of currency devaluation needs to be taken by RBA by cutting the cash rate

Table 6: Descriptive statistics of cash rate and fund rate

Australia’s Cash Rate	Federal Reserve Funds Rate US
Mean	5.451389	Mean	3.042315
Standard Error	0.501472	Standard Error	0.472257
Median	5.125	Median	3.213333
Mode	#N/A	Mode	#N/A
Standard Deviation	2.605724	Standard Deviation	2.453919
Sample Variance	6.789797	Sample Variance	6.02172
Kurtosis	5.892795	Kurtosis	-1.26609
Skewness	1.899752	Skewness	0.160086
Range	13.08333	Range	8.01
Minimum	1.729167	Minimum	0.089167
Maximum	14.8125	Maximum	8.099167
Sum	147.1875	Sum	82.1425
Count	27	Count	27

Table 7: Correlation between cash rate and fund rate

	Australia’s Cash Rate	Federal Reserve Funds Rate US
Australia’s Cash Rate	1
Federal Reserve Funds Rate US	0.762159991	1

A very high correlation is found to exists between cash rate and fund rate. The correlation between the two rate is 0.76. This indicates strong association between the two nations in terms of monetary policy.

 

Figure 4:  Relation between cash rate and fund rate

(FRED, 2018)

The result from correlation has further strengthened by similar trend of cash rate and fund rates over time. Starting from a very high rate, a gradual decline has been observed for both cash rate and fund rate. The cash rate however remained higher than fund rate throughout the entire period. The gap between cash rate and fund rate found to be increased significantly particularly after Global Financial crisis (Cummings and Wright, 2016). This us because USA economy that time needed greater monetary stimulus than Australia did. Though s high correlation is obtained between cash rate and fund rate however in practical RBA’s decision of cash rate does not much depends on fund rate. It is state of domestic economy that influences cash rate. Fed had lowered the fund rate especially after global financial crisis to expand lending opportunities and stimulates economic growth in USA. This kind of policy reflect expansionary monetary policy. After the crisis over Fed started to raise fund rate from 2015 (Rey, H., 2015). RBA alters cash to control the inflation rate. This is not always influenced by fund rate. In recent years, a hike in fund rate RBA had not change the cash rate and its remained at 1.50 percent (RBA, 2018).

Prediction of the macroeconomic outlook of Australia

Forecasting economic outlook

The Australian economy is relatively resilient in nature. In view of connection with the global economic world, any fluctuation in global market likely to cause a fluctuation in domestic market.  Australia’s growth was largely attributed by growing mineral demand and export. China, one major exporter of minerals from Australia has recently shifted growth strategy. The declining demand for minerals causes an economy wide slowdown. This might provide a gloomy outlook for Australian economy but in reality the economy has shown sign of recovery.  The export of Liquefied natural gas expected to improve the terms pf trade of Australia.  Given the diversified nature of the economy, investment has experienced a gain in non-mining resource sector and other areas. With fiscal and monetary policy stimulus, the business environment is improving which raises the profit prospect. The expected wage growth and low level; of unemployment will help to boost consumption growth, which is a major component of GDP (Drennan, McGowan and Tiernan, 2016).  A low risk in financial sector arise because of concentration of four big banks in the economy but still the economy will sustain the phase of economic expansion.

Conclusion

Based upon the analysis so far made, it can be concluded that Australian economy has constituted a more or less stable growth path. Fluctuations in the economic growth has been realized due to internal and global economic shocks explained with business cycle phases. Further GDP growth has a positive association with unemployment and that of an inverse relation with inflation. Australia exchanged goods and services with several developed and developing nations. The influence of relative price of Australian dollar has an adverse influence on net export. Higher the relative value lower is the net export and vice versa. The comparison of cash rate and fund rate revealed that USA and Australia both relied on an expansionary monetary policy as evidenced from a gradually declining cash rate and fund rate. In near future, the economy will experience a recession based on growth of non-mining sector and government policy support.

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