Economic conditions of Australia
Economic condition refers as a current situation of the company which depends on the business and economic cycle of the country and as the business and economic cycle change, the changes are also reflected in the economic condition of the country. There are various indicators which reflect the economic condition of the country such as gross domestic product rate, inflation rate, interest rate, employment data and many more.
In the year 2017, the Gross Domestic Product was $ 1.38 trillion (nominal), $ 1.26 trillion (PPP). Further, the per capita GDP was $ 55,707 (nominal) and $ 50,333 (PPP) which was more than as compared with the year 2016. The GDP represents the market value of the goods and services produced in a specified period of time, generally annually or quarterly. Further the rise in the GDP rate signals for the good economy condition of the country,
Another economic condition indicator is the inflation rate of the country. The inflation rate of Australia in the year 2017 was 1.92%, and in the year 2016 was 1.30% (CPI Inflation Calculator, 2017). This indicates that the inflation rate of the country increased by .62% (1.92-1.3). The increment in the inflation rate is not the good sign for the economic condition as it leads to the reduction in the purchasing power of the currency.
Moreover, the employment data of the country representative to the extent to which the available labours are utilized, and the unemployment rate represents the rate unemployment worker with respect to the total labour of the country. In the year 2017, September the monthly unemployment rate was 5.5% which was less than .2% as compared with the past year (Australian Bureau of Statistics, 2017). The reduction in the unemployment rate was good for the company as the more labour got employment.
The number of the housing stock of Australia is nearly about 10 million homes, along with, every month approximately 20,000 new apartment permitted, as of the year 2018. In July 2018, the total value of the home loans was $ 21.2 billion avail by the owner of the house. With regards to this the average loan size of housing loan around $ 397,300 (Australian Home Loan Statistics, 2018).
By considering the economy of Australia, it can be said they are in the expansion stage of business cycle due to following reasons (Focused economics, 2018)
|
Trade balance |
2015 |
2016 |
2017 |
|
-13.1 |
3 |
10.0 |
|
Policy interest rate |
2015 |
2016 |
2017 |
|
2.0% |
1.5% |
1.5% |
|
GDP (USD bn) |
2015 |
2016 |
2017 |
|
1,233 |
1,266 |
1,379 |
Figure 1: Yield curve of Australia
(Source: Australia Government Bonds – Yields Curve, 2018)
Overview of the financial system of Australia
The financial system of the country enables the financers, owners, investors, moneylenders, borrowers to exchange the funds. The proper financial system is an essential part of the development of the economy.
In Australia, the AUD that is Australian Dollar is used as a medium of exchange. The value of the currency is determined by the demand of the value of the goods and services. For valuing the Australian dollar, it has to be ascertained that how much Australian dollar purchased in the foreign currencies, which measure the exchange rate. By considering the demand and supply, foreign exchange traders ascertain the exchange rate. The current value of the Australian Dollar against the US dollar is .71
For Australian currency, the credit rating for standard and poor outlooks at AAA with the consistent viewpoint. Further, in Australia, the Credit rating of Moody, with consistent viewpoint was fixed at AAA. The credit rating of Fitch, with a stable outlook, was last fixed at AAA. The credit rating of DBRS with a stable outlook is AAA. Normally, the credit rating is adopted by the self-governing financial funds, investors or the pension funds to overview the credit position of Australia which leads to the major impact on the borrowing cost of the country. (Australia-Credit Rating, 2018)
The amount of the government debt in the year 2017 was AUD 551.750 Billion, and in the year 2016 was AUD 420.405 Billion. It has been seen that the government debt of Australia in the year 2017 was more than in the year 2017. Further, the amount of debt as a percentage of the GDP was 41.90% which is the highest with comparison with the past ten years (Trading Economics, 2018). Reasons for increasing government debt is low trade balance and increasing investment expenditure.
Further, there is five stock exchange in Australia namely Australian Securities exchange, national stock exchange of Australia, Asia Pacific stock exchange, Bendigo stock exchange and the last one is Asia Pacific technology exchange.
The product and services which are dealing on a stock exchange include shares, securities, mutual funds, contract for differences, REIT (real-estate investment trust) and so on. Moreover, the 2258 stock is listed at the Australian Securities Exchange.
The trading on the stock exchange starts by 10.00Am and closed by 4.00PM (ASX Trading Hours, 2018).
The derivative stock exchange established in Australia in 2001, but after some time due to some reason it had been closed. At present there no separate derivate stock exchange in Australia (Australian Derivatives Exchange, 2018).
In Australia, the financial system is regulated by the Australian Securities and Investment Commission (ASIC), Reserve Bank of Australia (RBA), and Australian Prudential Regulatory Authority (APRA).
The ASIC is responsible for rules and regulations related to the financial market, accepting deposits, intermediary financial sector, and financial product such as insurance, investment. It enhances the safeguarding the consumer across the financial system. RBA is responsible for the monetary policy and minimizes the fluctuation in the financial system of the country. RBI has the power to set the standards for clearing and settlement policies so that the financial stability can be maintained. APRA is responsible for implementing the prudential policies that equalize the financial security and effectiveness, balance the competition.
Figure 2: Diagram showing the flow of funds between surplus and deficit units
Size of the capital market in the year 2017 was in terms of market capitalization $23.6 billion (AFMA, 2017).
Size of the money market in the year 2017 was in terms of funds is 352.00 AUD million (CEIC, 2018).
Size of the over the counter derivative market was approx. 16.8 billion in terms of traded value (ASX, 2018).
Difference between market risk and specific risk
Market risk
Market risk refers to the risk by which the investor is affected by the macroeconomic factors of the economy such as the inflation rate of the economy, business cycle and so on (Schanzenbach, and Sitkoff, 2017). In other words, market risk means the value of the investment of the investor is affected by the complete movement of the financial market (Benoit & et al. 2017). The market risk is also known as the systematic risk, which cannot be eliminated by the investor. However, the investor can hedge the market risk. For instance, if the investor is invested in another country then the currency risk, which is the price fluctuation in the rate of the currency, is the example of the market risk.
Specific risk is just the opposite of the market risk. It is the risk which is related to the specific investor (Henisz, and Zelner, 2015). Specific risk affects the value of the investment of the particular investor. This risk is also known as the non-systematic risk. The specific risk can be reduced or eliminated by the investor through the diversification (Kovach & et al. 2015). The example of the specific risk is that in a particular company the labour is on strike due to some reason. Since the production of the company significantly impacted by the labour strike, it is known as the specific risk, which is related with only the particular company.
References
AFMA, 2018. 2017 Australian Financial Markets Report. [PDF]. Available from < https://afma.com.au/data/afmr/2017%20AUSTRALIAN%20FINANCIAL%20MARKETS%20REPORT.pdf >. [Accessed on 13 October 2018]
ASX Trading Hours, 2018. [Online]. Available from <https://www.stockmarketclock.com/exchanges/asx/trading-hours>.[Accessed on 13 October 2018]
ASX, 2018. Equity Derivatives Statistics. [Online]. Available from < https://www.asx.com.au/products/equity-options/equity-derivatives-statistics.htm>.[Accessed on 13 October 2018]
Australia – Credit Rating, 2018. [Online]. Available from < https://tradingeconomics.com/australia/rating>.[Accessed on 13 October 2018]
Australia Government Bonds – Yields Curve, 2018. [Online]. Available from < https://www.worldgovernmentbonds.com/country/australia/>.[Accessed on 13 October 2018]
Australian Bureau of Statistics, 2017. Trend unemployment rate lowest in 4 years. [Online]. Available from <https://www.abs.gov.au/ausstats/[email protected]/lookup/6202.0Media%20Release1Sep%202017>.[Accessed on 13 October 2018]
Australian Derivatives Exchange, 2018. [Online]. Available from <https://www.marketswiki.com/wiki/Australian_Derivatives_Exchange>.[Accessed on 13 October 2018]
Australian Home Loan Statistics, 2018. [Online]. Available from < https://www.finder.com.au/australian-home-loan-statistics>. [Accessed on 13th October 2018].
Benoit, S., Colliard, J.E., Hurlin, C. and Pérignon, C., 2017. Where the risks lie: A survey on systemic risk. Review of Finance, 21(1), pp.109-152.
CEIC, 2018. Australia Net: Flow: Money Market Financial Investment Funds. [Online]. Available from < https://www.ceicdata.com/en/australia/flow-of-funds-flow-sna08-sesca08-financial-corporations-money-market-financial-investment-funds/net-flow-money-market-financial-investment-funds>.[Accessed on 13 October 2018]
CPI Inflation Calculator, 2017. Australian inflation rate in 2017. [Online]. Available from <https://www.in2013dollars.com/Australia-inflation-rate-in-2017>.[Accessed on 13 October 2018]
Focused economics, 2018. [Online]. Available from < https://www.focus-economics.com/countries/australia>.[Accessed on 13 October 2018]
Henisz, W.J. and Zelner, B.A., 2015. The hidden risks in emerging markets. In International Business Strategy (pp. 646-654). Routledge.
Kovach, J.J., Hora, M., Manikas, A. and Patel, P.C., 2015. Firm performance in dynamic environments: The role of operational slack and operational scope. Journal of Operations Management, 37, pp.1-12.
Schanzenbach, M.M. and Sitkoff, R.H., 2017. The prudent investor rule and market risk: an empirical analysis. Journal of Empirical Legal Studies, 14(1), pp.129-168.
Trading Economics, 2018. Australia Government Debt to GDP. [Online]. Available from <https://tradingeconomics.com/australia/government-debt-to-gdp>.[Accessed on 13 October 2018]
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