Performance Analysis Of Australia’s Economy (1990-2015)

Real GDP and Economic Indicators

Over the last few decades, the economy of Australia has emerged as one of the strongest economies in the global framework and is currently one of the largest mixed economies in the world. Much of this can economic prosperity of the country can be attributed to the consistent economic growth of the country, stable employment scenes and striking growth in the industrial and commercial sectors (Plumb, Kent and Bishop, 2013). In the recent periods, the country has developed a robust service sector, which contributes more than 60% in the GDP of the country and makes provision of employment for more than 70% of the total labor force. Among the other significant industries of the country, are mining and gas industry, which contribute significantly in the economic prosperity of the country. The export sector of the country has also grown impressively over the years (Rees, Smith and Hall, 2016).

Keeping this aspect in consideration, the concerned assignment tries to evaluate the performance of the country’s economy between the time period of 1990-2015. To evaluate the same, the report tries to take into account the dynamics of the real GDP, unemployment rate, and rate of interest, net exports and the exchange rate in the country over the concerned period. The report also tries to analyze the policy implications and tries to predict the outlook of the economy of the country in future.

The primary indicator of economic dynamics in a country is the movements in the Gross Domestic Product of the country, which is the sum of the value of all the goods and services that are produced within the geographical domain of that particular country within one economic year. The GDP, being one of the primary growth indicators of the economy of any country, is itself dependant on several exogenous as well as endogenous factors and their dynamics in the concerned economy. Of these factors, the ones of primary implications are the cash rate (interest rate), unemployment, exchange rate, inflation rate and the value of the net exports of the concerned country. This section of the assignment tries to analyze the relation of the GDP of Australia with the above-mentioned determining factors in the economy of the country (Butlin, 2013).

For the purpose of estimating the same, the value of the Real GDP is obtained for the time period of 1990-2015. Real GDP is an inflation-adjusted measure of the economic growth, which is calculated by considering a fixed year or a base year of less economic turmoil. The average growth of the Real GDP in the country is seen to be around 3.1%, with the highest accounted growth being 5.01% (1999) and the lowest being -0.38% (1991) (McLean, 2012). The relation of the Real GDP with the five other economic indicators is shown as follows:

Unemployment Dynamics

The relationship of the dynamics of the Real GDP of Australia, over the concerned period of time, with the other indicators, can be summarized as follows:

Table 1: Relation of Real GDP with other five economic indicators

Correlation between GDP and five indicators
	Real GDP growth rate	Cash Rate	Unemployment rate	Inflation rate	Exchange rate	Net exports
Real GDP growth rate	1
Cash Rate	-0.08	1
Unemployment rate	-0.13	0.28	1
Inflation rate	-0.03	0.64	-0.23	1
Exchange rate	0.20	0.04	0.26	0.08	1
Net exports	0.23	0.26	0.55	-0.02	0.85	1

(Source: Created by the author based on the data collected from World Bank: Data.worldbank.org, 2018)

One of the primary economic indicators of the overall welfare of the country as well as its residents is the rate of unemployment as much of the welfare of the residents of the country is dependent on the scope of employment and economic prosperity of the residents. Australia, in this context, has maintained an average unemployment rate of around 6.77% in the concerned period, with the same reaching as high as 11% in 1994, while the same reduced to 4.4% in 2008, the latter being the least. The level of employment is directly linked to the growth in the GDP of the country, as the increase in the latter implies greater productivity and greater job scopes in the economy. Thus, the relationship between the real GDP and unemployment in Australia is expected to be negative (Gregory and Smith, 2016).

From the above figure, it can be seen that the two economic variables move in reverse direction and the correlation between the same is estimated to be -0.13, which in turn implies that there exists a negative linkage between the Real GDP and the unemployment dynamics of the country. From the above figure, it can be asserted that the unemployment rate of the country has decreased considerably with the increase in the Real GDP of the country with time. In the recent period, there has been a considerable increase in the employment generation in the country, with the total employment rising to 12.44 million. Much of which is attributed to the increase in the labor force participation rate, which has increased by 0.2% in the recent period (Whiteford, 2014).

The cash rate, in Australia, is the rate of interest, which is charged by the Reserve Bank of the country, on the loans to the other commercial banks of the country. On an average, the cash rate in the country, in the given period has been around 5.63%. In general, in the presence of a low level of cash rate, the commercial banks can borrow more from the Central Bank of the country, which in turn increases the liquidity in the economy by increasing the availability of loan able funds in the economy (Deans and Stewart, 2012). This in turn, is clubbed with an increase in the overall investments in the country as investment and the rate of interest in the country are inversely related. The GDP of the country is positively affected by the increase in the investment, which in turn implies that there is supposed to be an inverse relationship between the cash rate and the Real GDP dynamics of the country.

Cash Rate and Real GDP

As can be seen from the above figure, there exists an inverse relationship between the growth rate of the Real GDP and the Cash rate of the country, which asserts the above economic conceptual derivation. The correlation is also found to be -0.08, which indicates towards the presence of a negative relation between the concerned variables.

As can be seen from the above figure, with time, the growth rate of the Real GDP of the country has increased, whereas the cash rate has also decreased with time. This in turn indicates towards the presence of an expansionary monetary policy framework in the country. This can be related to the increase in the demand and supply side activities of the construction sector of the country and the continuous increase in the demand for residential investment, which in turn is boosted by the expansionary monetary policy. This justifies the low rate of cash rate prevailing in the economy. The cash rate was as low as 2.13% in 2015, which was deliberately done by the RBA in order to cater to the economic growth in the country (Shamsuddin and Xiang, 2012).

The rate of inflation in a country depicts the overall price level in the country at a point of time and has significant implications on the overall economic growth and welfare of the country. In general, a very high or a very low inflation are both detrimental to the growth and welfare of the economy of a country. A moderate inflation level, of demand-pull nature, helps in increasing the production of the country as a whole. However, if there is cost-push inflation, due to the increase in the overall cost of production, then it affects the economy adversely (Lutz, 2014).

Australia, has over the years, maintained a consistently stable price level with the average inflation rate being 2.7%. However, the decade of 1990-2000 has seen substantial amount of fluctuations in the same, with the highest being 7.27% (1990) and the lowest being 0.25% (1997). In general, the Real GDP of a country is expected to be positively related with the rate of inflation in a country as with an increase in the productivity and economic prosperity, the aggregate demand in the country increases, thereby exerting an upward pressure on the price levels.

However, as can be seen from the above figure, there exists a negative and highly fluctuation relationship between the two economic indicators in Australia for the concerned period. The correlation between the same is also found to be -0.03, which contradicts the theoretical conventions. In general high inflation is expected to be accompanies by a high GDP growth rate. However, here inflation adjusted growth rate is seen to be having a roughly inverse trend, much of which can be attributed to the presence of the debt crisis in Australia as  the presence of a high debt along with a high rate of inflation affects the GDP growth of the country adversely. The trends are found to be similar in this case (Kumar, Webber and Perry, 2012).

Inflation Rate and Real GDP

The net exports in a country are the estimate of the balance of trade, which is obtained by deducting the import spending from the earnings from the exports. Thus, the presence of a positive net export balance implies that the value of exports of the country is bigger than the value of imports, which in turn indicates towards a positive economic growth trend in the country. In this context, over the years, Australia has significantly improved its global trade scenario by setting up productive trade relations with almost all the major economies in the country. The trade balance of the country has been mostly positive with an average balance being nearly 20 billion AUD. There should be a positive relation between the growth rate of the Real GDP and the net exports in the country.

As can be seen from the above figure, there has been a positive trade balance in the country over the years, barring the last few years, which is accompanied by the increase in the growth rate of the Real GDP. The correlation is also estimated to be 0.23. However, in the last few years, the country has been experiencing a deficit in its trade balance, which can be attributed to an increase in the imports of intermediate and consumption goods and also an increase in the services which are imported by the country in the last few years (Makin and Narayan, 2013). This increase in imports has surpassed the volume of increase in the export of the metals, mineral ores and fuels, thereby increasing the trade deficit in the country.

The exchange rate prevailing in a country is the value of the domestic currency measured in terms of the currency value of the country with which it is compared, the country conventionally taken being the USA. When the exchange rate increases, it indicates towards the devaluation of the domestic currency, which in turn makes exports cheaper. The cheaper exports, by their increased demand contribute positively on the GDP of the country, thereby indicating towards a positive relation between the two parameters theoretically.

This is however, supported by the empirical evidences in Australia, as the correlation between the two concerned variables is found to be 0.20.

As is evident from the above figure, the exchange rate of the country has been more or less stabilized between 1 and 2 USD, with the level being moderate. This has however, been accompanied by a growth rate in the real GDP of the country, though the latter has been subjected to considerable fluctuations over the concerned period of time (Manalo, Perera and Rees, 2015).

Net Exports and Real GDP

In general, there exists a negative relationship between the rate of inflation and the unemployment rate in a country, which can be explained with the help of the economic theory of Phillips Curve, named after A. W. Phillips. As per the assertions of this theory, with the increase in the economic growth of a country, the employment scopes in the economy increases, thereby decreasing the unemployment in the economy (Forder, 2014). However, with the increase in GDP and aggregate demand, the price level in the country increases, which in turn increases the inflation rate.

For Australia, the correlation between inflation and unemployment is seen to be -0.23, which confirms the assertions of the Phillips curve.

The dynamics in the above two indicators show a prominent inverse relationship, barring several exceptions, one of which mainly occurred post 1990, specifically in 1994-1995 and in 2002-2004, when the fall in inflation is also seen to be accompanies by a fall in inflation also. This may be attributed to the post recession policy framework adopted by the RBA, with the twin objectives of reducing both the inflation to a moderate level and the unemployment to an acceptable range. The RBA has done the same by targeting inflation first and then by adjusting the market rates of interest.

The monetary authorities of a country in the presence of a high inflation rate take contractionary or tight monetary policies. In Australia, this has been done by the RBA during the late 1980s, when the inflationary pressure was extraordinarily high due to the presence of high cash rate (15%). The tight monetary policy however, landed the economy in recessionary shocks, which again forced the RBA to ease their monetary policy, by following a quantitative easing policy by reducing the interest rates in the country. However, again in 2004, the monetary authority again resorted to tight monetary policy in order to combat the excessive aggregate demand and inflationary pressure in the country (Carpenter and Demiralp, 2012). The presence of high household debt was also one of the reasons behind the implementation of such policies.

Based on the past and the present traits in the economic growth of the country, the future growth rate of the country is predicted to be between 2.5% and 3.5% in the recent years. The rate of interest is expected to be kept at a low level deliberately to contribute to the economic growth of the country. However, the wage and the savings rate are both predicted to remain at a moderate level, which might actually help in keeping the inflation at a low level. Investment, however, is expected to gain impetus, attributing to the growth of the housing and construction sector. The expected risk of recession is also low for the country, due to the withering out of the effects of the housing bubble burst (Oecd.org, 2018).

Policy Implications

Conclusion 

From the above discussion which analyzes the macroeconomic performance of the country between 1990-2015, it can be asserted that the performance of the economic indicators of Australia has been moderately stable, barring several non-dramatic negative fluctuations, which can be explained by the occurrence of different economic phenomena in the country as well as globally. The behaviors of the indicators, barring several exceptions, are seen to mostly abide by the economic theories and modules and the stability of the economy can be mostly attributed to the inherently robust policy framework of the country.

References 

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