Macroeconomic Performance Of Australia And New Zealand From 1995 To 2015

Inflation and real GDP growth rate

Australian economy has long been experienced a steady growth. This is the only exceptional economy that escaped from global recession in 2008. The economy in recent years however experienced a relatively slow economic growth sourced from unfavorable weather condition and slowing investment in mining and housing sector. The strong economic position is still maintained by the business investment, government spending and large scale export. New Zealand is an economy that maintained a free market environment. After the recessionary shock in 2008, the economy was able to make a fast recovery and continued to grow at a rate of 2.1 percent since 2010 (Easterly and Levine, 2016) The paper prepares a brief report summarizing performance of the economy from 1995 to 2015. The relation between different economic variables are examined by observing trend overtime.

Gross Domestic Product is a convenient tool for analyzing aggregate output of a nation. It is a measure that represents the market value of produced aggregate output in an economy. There are two methods of computing GDP of a nation (Ellis, 2018). One is to use current year market prices and other is to compute GDP at constant prices. GDP at current year prices is termed as nominal GDP wile GDP at the constant prices is termed as real GDP. Now, real GDP growth rate measures the change in GDP from one year to another presented in percentage terms. It actually reflects the rate at which economy grows overtime. The movement in the economy’s price level is captured by the measured inflation rate. It is computed as a change in living cost index in two separate periods. Increase in real GDP might increase inflation by increasing demand side pressure (Goodwin, et al., 2015). Cost-push inflation on the other hand might have a detrimental impact on GDP growth as is disrupts production by increasing cost. The direction of relation between inflation and growth in real GDP depends on economic structure and policy intervention. 

The real GDP growth and inflation trend in Australia is summarized below

Table 1: Summary of growth in real GDP and inflation in Australia

Real GDP growth Save Time On Research and Writing Hire a Pro to Write You a 100% Plagiarism-Free Paper. Get My Paper	Inflation
Mean	3.31	Mean	2.66
Standard Error	0.20	Standard Error	0.26
Median	3.66	Median	2.61
Mode	#N/A	Mode	#N/A
Standard Deviation	0.89	Standard Deviation	1.18
Sample Variance	0.80	Sample Variance	1.40
Kurtosis	-0.98	Kurtosis	-0.30
Skewness	-0.05	Skewness	0.00
Range	3.10	Range	4.39
Minimum	1.92	Minimum	0.25
Maximum	5.02	Maximum	4.64
Sum	69.46	Sum	55.86
Count	21	Count	21

Australian average growth rate from 1995 to 2015 is estimated to be 3.31. In the summary statistics, the estimated standard deviation measures the fluctuation in the growth rate overtime. Standard deviation of the GDP growth series for the taken period is 0.89. The relatively small standard deviation means that GDP growth remains almost stable over the chosen period. The highest GDP growth was recorded in 1999 with rate being 5.02 percent. The lowest growth rate is recorded in 2009 with a rate being 1.92 percent. For inflation the mean inflation rate in the studied period is 2.66. The inflation series constitutes a stable trend as reflected from smaller standard deviation value of 1.18 (The World Bank, 2018). Australian economy in the chosen time frame experienced inflation rate as high as 4.64 percent in the year in 1995. The lowest inflation is recorded in the year 1997 with the rate of 0.25 percent.

Analysis of unemployment rate in Australia and New Zealand

 

Figure 1: Growth in GDP and inflation in Australia (1995-2015)

The graph above summarizes movement of GDP and inflation in Australia. The accounted GDP growth in the year 1995 was 3.83 percent. The corresponding inflation rate in that year was 4.64 percent. Growth continued to increase until 1999. Growth rate in that year was 5.02 percent. Inflation on the other hand continued to decrease indicating growth to be negatively related with inflation rate. In the beginning of twenty first century, growth rate declined to 1.93 percent. Inflation however increased to 4.38 percent in 2000 (Manalo, Perera and Rees, 2015). Growth rate again picked up after that with average growth rate remaining around 3 percent. The economy grew at the slowest pace in 2009. This is because of the hit of global financial crisis. Price level was also at a relatively low level to 1.82 percent. Both growth and price level recovered since 2010 (Kenourgios and Dimitriou, 2015). The current monetary policy framework for Australia aims maintain a stable price level. The successful implementation of RBA’s monetary policy now achieves a targeted growth rate with a stable growth rate.

The real GDP growth and inflation trend in New Zealand is summarized below

Table 2: Summary of growth in real GDP and inflation in New Zealand

Real GDP growth	Inflation
Mean	2.97	Mean	2.16
Standard Error	0.34	Standard Error	0.26
Median	3.27	Median	2.29
Mode	#N/A	Mode	#N/A
Standard Deviation	1.57	Standard Deviation	1.18
Sample Variance	2.47	Sample Variance	1.40
Kurtosis	2.10	Kurtosis	-0.79
Skewness	-1.09	Skewness	0.15
Range	6.74	Range	4.15
Minimum	-1.55	Minimum	0.28
Maximum	5.19	Maximum	4.43
Sum	62.34	Sum	45.36
Count	21	Count	21

In New Zealand, average growth rate from 1995 to 2015 is estimated to be 2.96. In the summary measures, the estimated standard deviation measures the fluctuation in the growth rate overtime. Standard deviation of the GDP growth series for the taken period is 1.57. The relatively small standard deviation means that GDP growth remains almost stable over the chosen period. The highest GDP growth was recorded in 1995 with rate being 4.58 percent. The lowest growth rate is recorded in 2008. During this year, the economy recorded a negative growth rate of -1.55 percent. For inflation the mean inflation rate in the studied period is 2.15 (The World Bank, 2018). The inflation series constitutes a stable trend as reflected from smaller standard deviation value of 1.18. New Zealand’s economy in the chosen time frame experienced inflation rate as high as 4.43 percent in the year in 2011. The lowest inflation is recorded in the year 1999 with the rate of 0.28 percent.

 

Figure 2: Growth in GDP and inflation in New Zealand (1995-2015)

The growth and inflation series of New Zealand in summarized in figure 2. The real GDP growth rate in the year 1995 was recorded to be 4.58 percent. The associated inflation rate in the year 1995 is 3.76 percent. In the next three years, the GDP growth declined on a continuous phase. The growth rate though recovered in the year 1999 with growth rate reaching to 5.19 percent. The associated inflation rate was very low at 0.28. After that economic growth rate and associated inflation rate mostly moved in opposite direction (Pradhan, Arvin and Bahmani, 2015). It is in the year 2009, when both inflation and GDP growth rate remained at a significantly low level. The economic slow-down can be explained by the recessionary effect of global financial crisis in the year 2008. Real GDP growth in New Zealand gradually speeded up thereafter. In 2015, the economy grew at a rate of 4.43 percent. The monetary policy design of central bank however helped to keep mitigate the inflationary pressure on the economy (Benetrix, Lane and Shambaugh, 2015).

Rate of unemployment is used as an indicator of labor market performance in the economy. It is number of unemployed people in the labor market expressed as a percentage of total labor force. In a nation, unemployment rate in the economy depends on state of the economy. The external economic condition often affects the condition of unemployment in a nation. The influence of unemployment in one nation on another nation is subject to the relation between two nations (Bernanke, Antonovics and Frank, 2015) Australia and New Zealand shares a good economic relation in terms of foreign trade and investment. New Zealand is considered as fourth largest destination of export for Australian goods and the largest export destination for service. New Zealand makes significant investment in the Australian economy compared to other nation in the world. Australia also is the largest source of foreign investment in New Zealand (New Zealand Ministry of Foreign Affairs and Trade, 2018).

The rate of unemployment in New Zealand and Australia is summarized in the table below

Table 3: Summary of unemployment rate in Australia and New Zealand

Australia	New Zealand
Mean	6.09	Mean	5.53
Standard Error	0.28	Standard Error	0.25
Median	5.93	Median	5.76
Mode	#N/A	Mode	6.14
Standard Deviation	1.29	Standard Deviation	1.16
Sample Variance	1.66	Sample Variance	1.35
Kurtosis	-0.37	Kurtosis	-0.73
Skewness	0.68	Skewness	-0.20
Range	4.28	Range	4.12
Minimum	4.23	Minimum	3.60
Maximum	8.51	Maximum	7.72
Sum	127.88	Sum	116.14
Count	21	Count	21

Australian unemployment rate for the chosen time period is averaged at 6.09 percent. Standard deviation for the unemployment series is 1.28. (Australian Bureau of Statistics, 2018) As the standard deviation is lower than the average unemployment rate implying a relatively stable unemployment rate. For New Zealand, the rate of unemployment is 5.53, marginally lower compared to Australia (The World Bank, 2018). Standard deviation for the unemployment series of New Zealand is lower than that in Australia. The standard deviation of unemployment for the selected range of years is 1.16. Like Australia, the unemployment series in New Zealand remains relatively stable as reflected from the smaller standard deviation.

 

Figure 3: Unemployment rate in Australia and New Zealand (1995-2015)

In New Zealand, unemployment rate is mostly lower as compared to the unemployment rate in Australia. From 1995 to 1997, unemployment rate in Australia was significantly higher than New Zealand. Unemployment in Australia was very close to that in New Zealand for the three consecutive years of 1998, 1999 and 2000. During this time, unemployment rate in Australia continued to decline while unemployment rate in New Zealand continued to increases (Uddin, Alam and Gow, 2016). Economic growth in New Zealand helps to reduce unemployment in later years. As a result unemployment rate in New Zealand again went below that in Australia. Following the shock of global financial crisis unemployment in New Zealand increased from 2009 onwards and exceeds the corresponding unemployment in Australia. The New Zealand economy gradually recovered the recessionary shock. With improvement in economic growth unemployment has declined as well. The decline in unemployment rate in New Zealand causes unemployment to fall below the unemployment rate in Australia (Baker, Bloom and Davis, 2016).

Cash rate and official cash rate both are instruments of monetary policy used by central bank of Australia and New Zealand respectively. In Australia, the decision regarding monetary policy is taken by setting a targeted cash rate. Cash rate is the overnight rate charged on the borrowed sum of money. The Reserve Bank of Australia reviews the inflationary condition in the economy and then adjust the cash rate in accordance to the targeted inflation rate (Reserve Bank of Australia, 2018). If actual inflation rate is above the targeted rate then RBA reduces the rate. In situation where actual inflation is below the targeted rate, the RBA takes the ease monetary policy and lowers the cash rate. Monetary policy in New Zealand is designed to achieve stability in prices. Current target of the Central Bank is to keep the inflation rate ranged from 1 to 3 percent. The central bank designs monetary policy by adjusting the official cash rate. Central bank of New Zealand reviews the official cash rate eight times in a year (Reserve Bank of New Zealand, 2018).

The summary of cash rate and official cash rate is given in the following table:

Table 4: Summary statistics of official cash rate and cash rate

Cash rate	Official cash rate
Mean	4.85	Mean	4.84
Standard Error	0.31	Standard Error	0.38
Median	5.00	Median	5.00
Mode	5.25	Mode	4.75
Standard Deviation	1.42	Standard Deviation	1.74
Sample Variance	2.03	Sample Variance	3.04
Kurtosis	-0.35	Kurtosis	-1.09
Skewness	-0.33	Skewness	0.08
Range	5.38	Range	5.44
Minimum	2.13	Minimum	2.50
Maximum	7.50	Maximum	7.94
Sum	101.81	Sum	101.59
Count	21	Count	21

The average overnight rate in Australia is almost same as that in New Zealand. The average cash rate is obtained as 4.85. The same for Official Cash Rate is 4.84. For both the series of cash rate and official cash rate standard deviation is less than that of the average overnight rate implying the central bank in both Australia and New Zealand has maintained a relatively stable trend in the cash rate.

 

Figure 4: Trend in cash rate and official cash rate (1995-2015)

Previously, cash rate and official cash rate constitutes the same trend. It was then believed that the Central Bank’s policy in New Zealand follows the policy initiative taken by central bank of Australia. The leader followers’ trend in designing monetary policy however marked a break at the ending note of 2001 (Murray, 2017) The monetary policy coordination between the two nations had broken down since then. In the may quarter of 2002 central bank of both the nation took the independent decision of implementing a tight monetary policy. The central bank of New Zealand increased the cash rate by 0.25 basis point with the cash rate becoming 5.00 percent. During this time Reserve Bank of Australia also raised the cash rate from 4.25 in April, 2002 to 4.50 in May, 2002. The decision in New Zealand however was taken in advance to that in Australia. Both the nation again took a coordinated decision of lowering the interest rate in 2006. In New Zealand, the official cash rate ranged around 3 percent. The same in Australia during that period averaged around 2 percent.

In the phase of tight monetary policy, Reserve Bank raises the overnight cash rate. The higher increases rate by increasing the cost of borrowed fund restricts economic activity and control inflationary pressure (Heijdra, 2017). As evidenced from the data series of cash rate and official cash rate, in the past decade the settled bank rate in New Zealand is higher as compared to cash rate in Australia. The economic growth is relatively stronger in New Zealand. The slow growth rate in Australia induces the Reserve Bank to set the interest rate at a relatively low level.

The outlook for Australian economy remains relatively stronger compared to other peer countries in the OECD group. The economists predict real GDP growth rate to be around 2,8 percent for the next two years. The string growth position of the Australian economy is expected to be supported by the investment is sectors other than mining sector. The future economic growth of the nation is largely dependent on export sector and activity outside mining or construction. Condition of the labor market is expected to improve with rate of unemployment being declined to 5.3 percent (Bernanke, et al., 2018) Given the uncertainty of China’s economy, sectors linked to the China is expected to experience an environment of uncertainty and risk.

Like Australia, the outlook for New Zealand economy is positive and strong with the economy forecasted to grow at a steady pace over the next five years. There are several factors that are expected to support economic growth in future. New Zealand experiences a higher inflow of migrants. This strengthens the labor market in New Zealand. Besides, low interest rate provides support to the private investment and consumption (Simon-Kumar, 2015). The service export in terms of increased number of tourists contributes to economic growth of the nation. Growth is expected to be accelerated to 3.8% by 2019. Steady economic growth along with a moderate inflationary pressure and low unemployment rate ensures strong economic position.

Conclusion 

Analysis of economic environment of Australia and New Zealand from 1995 to 2015 reveals that economic environment in Australian is quite similar to that in New Zealand. In both the nation inflation is likely to be inversely related to that of the real GDP growth rate. The inflation in both the nation in recent years is in control because of the design of monetary policy in both the nation. The labor market condition in New Zealand is stronger than that in Australia. The trend unemployment in Australia mostly lies above the trend rate in New Zealand with exception in only few years. RBA uses cash rate to achieve its inflation target. Central bank of New Zealand achieves attains the inflationary goal using official cash rate. Average bank rate in Australia is close to the average rate in New Zealand. Previously, there was a dependency in the monetary policy decision of both the central banks. The independent decision of monetary authority shows tendency towards an ease monetary policy to attain flawless economic growth.  Both the economy tends to constitute an overall steady performance in the upcoming years. 

References list 

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