Evaluation Of Macroeconomic Performance Of Australia: Trends And Analysis

Summary Statistics of Key Macroeconomic Indicators

Australia is a country which comprises the continent of Australia, island of Tasmania and some other small islands. By total area it is the sixth largest country in the world and it is also known as the 13^th largest economy with the 9^th largest per capita income (Murphy, 2017). In the following sections we analyze the economy of Australia based on certain macroeconomic indicators and see how the country has developed since 1960. We see the trends in the different macroeconomic indicators like real GDP, GDP per capita, inflation, unemployment, exchange rate and exports and imports. The trends show how Australia had been doing economically since 1990 with its continuous growth without any recession and trends of the other factors.

In the below two tables we have tabulated the summary statistics of all the macroeconomic indicators considered for the period 1990 to 2015.

We see the average inflation rate over the years had been 2.73% with a standard deviation of 1.46. The maximum inflation rate attained had been 7.3% whereas the minimum had been 0.25%. The average GDP per capita of the country is also found to be 454443.48 while the average unemployment rate had been 6.76%. Average consumer price index had been 82.95 with a maximum of 112 but a high standard deviation of 16.8 indicating there had been a vast variability in the CPI values.

The table below shows the summary statistics of the rest of the variables. We see the average share of exports had been 19.14 % of the GDP as for imports is 20.16% indicating a current account deficit. The average rate of change in net exports justifies the deficit with a value of -47.53% which is relatively very high, although the standard deviation of 247.4 indicates the volatility in the figures. The growth rate of GDP had been an average of 3.1% since 1990 to 2015 with a low standard deviation and the average real interest rate had been 5.3%.

Australia is seen to experience unprecedented growth without any recession for more than 25 years. Compared to other south – east Asian countries Australia did not face any such major difficult on its way to independence an hence, did not experience any such negative impact on the economy (Scutt, 2016). This made its development journey to be easier. If we try to assess the economic performance of the country, GDP or gross domestic product is the most common measure. GDP is categorized into two types which are Nominal GDP and Real GDP. Nominal GDP is the GDP that is calculated based on current prices. Real GDP is the total amount of final goods and services produced in an economy based on a price of some base year (Mankiw, 2014). The graph below shows the real GDP of Australia since 1990. As we see that over the years real GDP of Australia had been continuously increasing, implying high income and good standard of living.

Real GDP

The 2011, Credit Suisse Global Wealth report, says that Australia has an average wealth of 222,000 USD which is worldwide the highest and close to four times the total of each US adult. The proportion which is with wealth above 100,000 USD is the highest of any country, i.e., eight times the world average. Average wealth was 397, 000 USD, the world’s second-highest after Switzerland. The 2014 wealth report shows that this implies a large bequest of land and natural resources relative to population, and also being a result of high urban real estate prices (Scutt, 2016).

The GDP growth rate graph below shows the trend in the economic growth rates of Australia. The country had been a recession in the early 1990s but had been growing later. The average GDP growth rate had been around 3%, whereas since 2013 the growth rates are seen to be falling marginally and is below 3%.

But a better measure of economic performance or development is GDP per capita which is calculated by dividing GDP by the total population. This measure is evidently better because it takes into account the population of the country and hence how is income divided in this population (Samuelson et al, 2010). Australia having a smaller population had reaped off the benefits of the growing GDP more easily. The smaller population of Australia had increased its GDP per capita implying higher income in the hands of the people and hence, better standard of living. In the graph below we see the GDP per capita of Australia over the years. The increasing GDP per capita implies increasing income in the country by per capita. As we see Australia’s GDP per capita had been above 50000 $ since 2005 which is comparatively higher than many other countries.

The prices prevailing in an economy is also a crucial factor in reflecting the health of the economy. Businesses and investors take increasing prices as a threat to returns and hence, tend to avoid investing in such countries or during such periods. A measure of the prices of goods and services in a country is the Consumer price index or the CPI which is calculated as the weighted average of the different prices of goods and services included from all sectors in the economy. This CPI reflects the prevailing prices or the cost of living in the economy. CPI of Australia is seen to increase over the years. It was 61 in 1990 and had gone up to 113.5 in 2016. This reflects that as Australia’s income grew since 1990 naturally its prices also increased due to the rise in aggregate demand.

GDP per capita

The growth rate of CPI from one year to another is called the inflation rate. It is the rate at which prices rise. The inflation rate is an indicator showing how fast the prices in the economy are rising. High rates of inflation raise concerns for the central bank and the policy makers as it reduces the purchasing power of the people. Inflation can be from the supply side as well as from the demand side. From the supply side, a rise in inflation is because of the cost push inflation. This occurs when the prices of factors of production increases which leads to higher costs of production forcing producers to raise prices and transfer this cost to consumers. On the other hand when the aggregate demand in the economy increases leading to excess demand given the fixed aggregate supply, a rise in prices occur which is called the demand pull inflation. Inflation forces producers to increase costs and higher prices also reduce the demand for products of such producers or businesses. This leads to lower revenue as well as higher costs and hence, making business difficult along with investors moving away from investing at such periods. The exact opposite of inflation is deflation which is the fall in prices. It may be thought of that deflation is something good and of no harm but in reality deflation signifies a weak economy and hence acts as a signal for investors.

The graph below shows the periods of inflation in Australia since 1990. The trend shows how inflation rates had seen both highs and lows, but the highest rate had been in 1990 which was over 7%. After which inflation rates in overall have gone down. Since 2008 Australia is seen to experience falling inflation rates. The rates have fallen beyond 4.3% reaching 1.27% in the last few years. The falling inflation rates do have implications but it depends why the inflation rate is falling. If inflation rates is falling because of lower aggregate demand it implies that the country is experiencing very slow economic growth whereas if it occurs due to increased productivity and technology it implies a rightward shift of the aggregate supply curve. But falling inflation rates shall also induce more exports, less uncertainty and volatility.  

Inflation rates are also closely related to unemployment rates. Going by the Phillips curve theory, higher inflation rates are accompanied to lower unemployment rates, although in reality this is not always found to be true. Unemployment rate is as we know proportion of the labor force that are not employed but are actively searching for new job opportunities. If we see the trend in unemployment rate in Australia beside its inflation rate in the graph below, with unemployment rate beside the inflation rate, we can notice that there had been periods of high inflation accompanied by low unemployment rates. Although in 2008, both inflation and unemployment rates had been at par implying a situation of stagflation. The inflation rate in 2008 was 4.35% whereas the unemployment rate was 4.23%. The highest unemployment rate in Australia was seen in 1993 with 10.87% which in 2016 is 5.74%.

Inflation and Consumer Price Index (CPI)

Unemployment rates in Australia is manly structural and frictional in nature. A major contribution to unemployment rates is the youth unemployment. The country had been experiencing unemployment in the range of 5 to 6% through the years with specific high rises in particular years of recession. In depth analysis of regions in the country show that Tasmania had been experiencing high unemployment. Also looking into these regions and trying to find the cause of unemployment we see that with the growing youth population, youth unemployment specifically had been the major type of unemployment Australia had been facing. Apart from this the cause of the prevailing unemployment had been mostly structural or frictional in nature, a subpart of which may be regarded as the youth unemployment and also the lack of labor demand.

The labor market underutilization rate is found to be 14.3% for Australia implying that the economy is operating below its capacity and there is an output gap which as economists say has implications for wages and inflation. The dwelling price to income ratio had also been high reflecting the low interest rates and strong population growth. The high rates of immigration had also put an upward pressure on housing prices.

Real interest rate is the nominal interest rate less the inflation rate. It represents the real cost of borrowing. The real interest trend as obtained is illustrated below which shows that since 1991 there has been seen a falling trend of the real interest rate whereas after 2008 the rates have increased and are continuing to increase in the present times. The volatility of the real interest rates had been moderate. In 2015 the real interest rate is found to be 6.26%,

Another important indicator is the exchange rate. Exchange rate is the price of a nation’s currency in terms of another currency. Australia had adopted a floating exchange rate since the 1980s. As we see in the figure below, the trend in the exchange rate in Australia over the years. We see that the exchange rate had been the highest in 2001 with 1.93 AUD per US dollar. Higher exchange rates reflect the depreciation in currency or a stronger dollar which makes an increase in exports because for 1 dollar foreign people can buy more of AUD.

Therefore, exchange rate affecting the exports and imports is an important phenomenon as it affects the economy significantly. There had been a major increase in Australia’s terms of trade during the ascend of the commodity prices since 2000. The currently had seen large current account deficits for more than 50 years. High exports improve the net exports and the current account balance of the country. On the other hand increase in imports decreases the net exports. Net exports being an important component of aggregate demand, an increase in the factor boosts aggregate demand and hence economic growth (Sowell, 2010). As we see in the graph below, exports and imports of Australia. We can see that since 1990, both the components had seen an increasing trend. If we correlate the graph of the official exchange rate with this we can see that between 2000 and 2002 a peak in the exchange rate is correlated with a peak in exports and followed by a similar trend in both exports and imports as that of the trend in the exchange rate. Except for few perids generally we see imports had been higher in Australia than exports which implies a current account deficit for the economy and a fall in net exports.

Unemployment and Inflation

The graph below shows the rate of change of Net exports (NX). We see that the largest drop in net exports had been in 2008 of -1204%, when the difference in exports and imports had been -19830679912.4298 USD. The highest positive peak achieved in the change in net exports showing a high growth of exports is in 2011. After 2011 we again see a fall in exports and hence leading to negative changes in net exports.

There are two basic problems that the government tries to solve or regulate in an economy which are unemployment and inflation. These macroeconomic indicators do depend on economic growth and consumer behavior but mostly regulated by government policies and measures. The government takes various fiscal and monetary policies to regulate indicators like inflation and interest rates in the economy. Fiscal policies includes the instruments of tax revenue and government expenditures, Expansionary fiscal policy involves increasing government expenditures or reduction in tax rates to increase the money supply in the economy. This occurs to boost the aggregate demand in the economy which shall raise prices and output. Contractionary fiscal policies involve reduction in government expenditures and increasing tax rates which drive away money from the economy with lesser money in hands of the people, lesser spending, lower demand and hence, lower prices. Hence, in this way inflation is regulated. Coming to monetary policies they are also of both contractionary and expansionary in nature. An expansionary monetary policy involves, increasing the flow of money in the economy by reducing interest rates which induces increase in spending and output. Contractionary policies reduce the money supply as the central bank increases interest rates reducing aggregate demand (Lipsey et al, 2011). The central bank of Australia which is the Reserve Bank of Australia governs such monetary policies. It uses monetary policy instruments like open market operations or changing interest rates to regulate inflation in the economy.

Along with this the government also adopts various reforms and policies to regulate unemployment. . It has achieved the low unemployment rates through long term economic reforms which develop the microeconomic efficiency of an economy helping the economy grow steadily and responding to changes. Diverse reforms adopted by the government also includes trade reforms, deregulation of financial market, wide range of tax reforms, enhanced competition at different sectors, more flexible labor market, building of skills and capacity, welfare arrangement and transparent government decentralized framework for implementation of various policies. Apart from these, there is still high scope and potential to perform better and implement more in these areas bringing more growth, productivity and gains (Liberal.org.au, 2016).

In 2016, the government had predicted budget deficits to be bigger in the next four years and hence, a major concern for the government was bringing the budget to balance. It has been 99 quarters since the Australian economy has experienced a technical recession which is defined as two quarters of negative real GDP.

Apart from this one of the major goals of the government is to make sure income is fairly distributed among all the sections of the society and hence, there doesn’t arise a situation of inequality. Another role being in a market capitalist economy for the Australian government is to assure efficient allocation of scarce resources. The government assures that everyone has access to the reasonable standard of living with access to basic needs like health care and education.

Conclusion:

Thus we saw that Australia had been an economy which had experienced sustainable development with high GDP per capita, low unemployment rates and inflation rates. The country had been in current account deficit with the imports being higher that exports. Hence, the government should be focused on strengthening its trade balance by increasing exports. Government policies and reforms had been devoted in regulating these macroeconomic indicators and stabilizing the economy. In overall Australian economy is seen to be a developed country achieving high levels of income over the years indicating higher standard of living. The country is yet to reap off benefits from its underutilized population growth and maintain higher incomes over the years. The government

References:

Samuelson, P. & Nordhaus, W., 2010. Economics. New Delhi: Tata McGraw Hill

Lipsey, R. & Chrystal,  A., 2011. Economics.  New Delhi : Oxford,

Mankiw, G., 2014. Macroeconomics. New York: Worth publishers,

Liberal.org.au., 2016. Achievements in Government. Available at: https://www.liberal.org.au/achievements-government [Accessed 24 May 2017]

Scutt, D., 2016. It’s been 25 years since Australia was in recession. Available at: https://www.businessinsider.com.au/chart-of-the-day-its-been-25-years-since-australia-was-in-recession-2016-9#mj55i08eh7yskxce.99 [Accessed 23 May 2017]

Scutt, D., 2016. Australian economic growth is roaring. Available at: https://www.businessinsider.com.au/australia-q1-gdp-report-2016-6 [Accessed 23 May 2017]

Sowell, T., 2010.  Basic economics. USA: Basic books.

Murphy, J., 2017. Australian economy. Available at: https://www.news.com.au/finance/economy/australian-economy/things-are-looking-up-but-dont-be-fooled-by-the-latest-economic-growth/news-story/d042fe662ea24cc171b937b751087dc5. [Accessed 23 May 2017]

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