Analysis Of The Robustness Of Australia Economy

Summary Statistics of major macro variables

Discuss about the Analysis Of The Robustness Of Australia Economy.

Australian economy is considered as one of the biggest and highly developed economies of the world.  All the three sectors (agriculture, industry and service) have marked a rapid progress over the last few decades. Mining builds up the main industrial base of the economy. Australia produces and exports mineral like coal, iron ore, crude petroleum and others. In the sectors, education, travel, financial and professional services are the main. As like most of the developed countries, the economy of Australia shows high dependency on service sector (Aslani, Rezaee and Mortazavi, 2017. The expansion of various industries and services has helped to diversify the economy. Australia also actively participates in international trade and derives considerable income from external sector. The internal structure of the economy and uninterrupted growth experience has made the nation an attractive study of research.

Table 1: Summary Statistics

Descriptive statistics offers a brief summary of the performance of different chosen indicators. The various measures of summary statistics include a range of measure like average, standard, range, maximum, minimum help to understand the overall movement of the variables. Movements and distribution of variables provide useful insights about macroeconomic performance of the economy.

Real GDP is an aggregate measure of total output at constant base year prices (Goodwin et al., 2015). The mean of real GDP growth rate is obtained as 3.10. This implies for the chosen time frame, the economy grew at an average rate of 3.10 percent. The accounted highest GDP growth rate is 5.01 percent. The growth rate was achieved in 1999 (Azad et al., 2014). The minimum growth rate is -0.38. the minimum growth rate also achieved in the decade of 1990. During 1991, Australia experienced the slowest economic growth of -0.38 percent. Economic growth during the entire period was ranged as 5.38. Standard deviation of the real GDP growth is obtained as 1.21. As the standard deviation is lower than mean the measure of coefficient of variation is less than 1 implies a relatively stable distribution of growth.

Inflation is an indicative measure of rate of change in the price level (Setterfield, 2016). The average rate of inflation is 2.68. The average rate of inflation indicates that cost of living in Australia has increased on an average rate of 2.68. The highest inflation rate if 7.27. the highest inflation rate prevailed in 1990. As against this the lowest rate of inflation is 0.25 percent. The economy experienced lowest inflationary pressure in 1997. With this the rate of inflation ranged at around 7.02. For rate of inflation, a very small standard deviation is obtained with standard deviation being 0.28. Lower standard deviation implies a lower volatility and hence, a relatively stable distribution (Gillitzer and Simon, 2015).

Pair-Wise graph

The unemployment statistics reflect portion of labor market participants incapable to find jobs at current market wage (Johnson, 2017). The mean of the unemployment rate is 6.73. The mean unemployment rate indicates that for the period, 6.73% members of the labor force remained unemployed. Standard deviation for unemployment rate is 0.24. Because of a relatively higher average unemployment rate the coefficient of variation is less than 100 indicating a relatively stable distribution. The unemployment problem is most severe during 1993 (Carvalho, 2015). The unemployment rate during this period was 10.90. Recorded unemployment rate reached to the lowest level during 2008. There were 4.20 percent people in the labor market who were unemployed. Range of unemployment is obtained as 6.70.

Exchange rate between two currencies presents relative value of one currency in terms of other (Mankiw, 2014). For the exchange rate, the mean exchange rate is obtained as 1.35. The mean exchange rate shows that the average value of Australian dollar against US dollar is 1.35. Coming to standard deviation, from the summary statistics, the estimated standard deviation for the period is 0.24. standard deviation measuring distance of the data point from the mean value is a good measure to evaluate stability of distribution. The relatively small value of standard deviation indicates stability of value of Australian dollar against US dollar. The exchange rate varied between 1.93 percent to 0.97 percent. The high value of exchange rate indicates depreciation of home currency. The low exchange rate on the other hand indicates a currency appreciation.

Real interest rate is an inflation adjusted measure of interest rate. It is obtained as nominal interest rate less the rate of inflation (Borio,2014). The average real interest rate is 5.36. The real interest rate in Australia ranged between 10.07 to 1.04 percent.  Standard deviation of real interest rate is obtained as 2.48. The relatively higher real interest rate implies relative stability in the distribution of real interest rate (Hamilton et al., 2016).

The last variable considered is the net export. It represents the net gain from trade and obtained by subtracting import from export (Mankiw, 2014). The average growth of net growth of net export is 32.14 percent. The standard deviation is a very low of 3.12. The stability in net export growth implies a steady share of trade in real GDP. Net export growth of Australia ranged between 37.07 percent to 25.61 percent.

Figure 1: Relation between Real GDP growth and Inflation

(World Bank, 2018)

Figure 4: Relation between Real GDP growth and Exchange rate

(World Bank, 2018)

Gross Domestic Product is a macroeconomic indicator for measuring output at aggregate level. In the method for GDP computation to find out aggregate values of output respective market price of goods and services needs to be used. Conventionally, two types of market prices are used to estimate GDP. One is the market price of the year for which GDO is computed and other is to use market price of a pre-determined base year. The former is termed as nominal GDP while the latter is termed as real GDP. The main objective to use the fixed base year price is to obtain the actual values of output which is free from fluctuation in the price level. A high rate of inflation overstates GDP while deflation understate value of aggregate output. Growth in real GDP is the percentage change of real GDP between two consecutive years. Growth in real GDP is considered as a measure of economic growth and prosperity (Johnson, 2017).  There are different factors which contribute to a growth in GDP. GDP growth again influences several other indicators. Therefore, there exists an interrelation between GDP growth and other macroeconomic variables like inflation, unemployment, exchange rate, real interest rate and net export.

Table 2: Correlation analysis

The correlation matrix shows relation of real GDO growth with each of the macroeconomic variables along with representing association among each of the variables with other.

An inverse association is observed between inflation and GDP growth rate. The correlation between inflation and GDP growth is estimated to be -0.020. The moderate to low inflation rate is generally beneficial for economic growth. It encourages productive activities by raising profitability of firms. Growth in GDP on the other hand is expected to have a positive influence on price level through income and demand growth (Tung and Thanh, 2015). The proposed relation between inflation and GDP growth contradicts because active anti-inflationary measures taken by RBA. A very high inflation rate affects the standard of living by increasing price of consumption basket. The RBA has set its inflation target to stable rate of 2 percent. The ant inflationary measures help to achieve a higher growth with stability in the price level.

The correlation between real GDP growth and unemployment rate is negative. Value of the correlation estimate is -0.13. Negative correlation implies a negative association between growth of GDP and that of unemployment. This implies a higher GDP growth leads to a lower rate of unemployment. The economic rationale for this relation is simple. The fast growth in GDP implies that rapid expansion of output resulted from increased productive capacity. Expansion of goods market results in an expansion of factor market. Increase in labor market reduces the difficulties for finding jobs and hence a lower rate of unemployment (Ball, Jalles and Loungani, 2015). The same kind of relation between GDP growth rate and unemployment rate id obtained from figure 2, showing pairwise movement of GDP growth and unemployment rate. Because of the inverse association the unemployment rate and GDP growth converges with an expansion of economic growth.

A positive association is observed between exchange rate and real GDP growth rate. The estimated correlation between the two variable id 0.197.  The exchange rate represents price of Australian dollar against that of US dollar. An increase in the exchange rate has the implication of raising the value of US dollar. This is because one US dollar now receives a larger amount of Australian dollar. The relatively lower value pf Australian dollar reduces the effective price of Australian exportable (Saha and Zhang, 2016). This helps to increase demand for Australian export in the world market. As export increase, there is an increase in net export which increase real GDP and hence, economic growth. The effect of exchange rate on net export thus channeled through net export. Government often control movement of the exchange rate using monetary policy tool. The policy of raising exchange rate is called currency devaluation. The correlation analysis can be supported from graph presenting joint movement of GDP growth and exchange rate. From the graph it is seen the higher exchange rate is associated with a lower GDP growth vice versa. The higher exchange rate of 1.93 in 2002 is associated with a growth of only 1.93 percent. The lowest exchange rate of 0.97 on the other hand corresponds to a relatively higher growth rate of 3.63.

The real interest rate, which is price adjusted measure interest rate has a negative correlation with growth of GDP. The estimated correlation between real interest rate and GDP growth is obtained as -0.11. Interest rate represents the borrowing cost of capital. A lower interest rare means lower borrowing cost and hence a higher investment. The increased investment in the economy helps to stimulate economic growth. Government can influence real interest rate using monetary policy. In time if expansionary monetary policy, central bank lowers the bank rate charged on other commercial banks in the nation (Holston, Laubach and Williams, 2017). As the bank rate reduces, commercial banks can reduce interest charged on credit to stimulate investment., this helps to increase economic growth. Another channel through which interest rate can influence growth is exchange rate. Given all other things, an increase in the interest rate implies a higher return from invested fund. This makes foreign investment more attractive. Following an increase in the demand for home currency the relative price of currency increase which means a lower exchange ratio. This by reducing export reduces GDP growth. The obtained graph (figure 3), showing the movement of GDP growth and interest indicates real interest rate declined sharply from 1990 to 2001.  The decrease in interest rate led to a rise in GDP growth as shown from narrow gap between interest rate and GDP growth rate at low level of interest.

Finally, the correlation between GDP growth and net export growth is positive. The correlation is obtained as 0.213. The positive association between net export and GDP growth shows the favorable effect of net export on GDP growth (McCombie and Thirlwall, 2016). Net export, one of the four major components of GDP thus has a positive influence on real GDP and economic growth. The relation can be validated from time series graph reflecting trend in real GDP growth and net export. The graph shows an overtime increase in net export helps to stabilize economic growth.

From the trend analysis of real GDP growth, it is observed the stable growth trend of Australia has experienced a slight down in the economic growth rate. However, the slow growth is expected to overcome soon as the economic recovery has already begun. The weak growth in consumption demand is likely to be off set from growing business investment. The next phase of economic expansion will be based on investment in non-mining investment. The economy of Australia will further experience an increase in growth of its GDP as the sluggish mining investment is expected to over soon. The monetary policy support will uplift income growth and domestic consumption (Freebairn, 2015). Export of new resource like LNG over tradition resources will improve the terms of trade condition ensuring higher growth rate. Growth in public investment will provide a stimulus to domestic demand and economic growth. The economic recovery of Australia thus indicates that it will soon experience an economic expansion.

Conclusion 

The report critically discusses the performance trend of Australian over the last few years. The summary statistics reveal that the economy has growth on an average rate of 3.10 percent. The average growth rate has coupled with an average inflation rate of 2.68 and unemployment rate of 6.73 percent. The economic growth of Australia has remained relatively stable. The stability in the price level has been achieved mainly through the policy intervention by RBA. The average unemployment in Australia though is relatively high but it has decline significantly with a growth in GDP. Growth in net export has increased making a positive contribution to GDP. Growth of net export however is subject to variation in the exchange rate. If RBA takes the policy of currency devaluation, the this helps to increase export and hence, GDP growth. The real interest rate affects GDP adversely through the channel of investment. Given the relatively stable nature of Australian economy, the economy is going to enter in a recession.

Reference list 

Aslani, A., Rezaee, M. and Mortazavi, S.M., 2017. Analysis of the Robustness of Australia Economy and Energy Supply/Demand Fluctuation. Present Environment and Sustainable Development, 11(2), pp.35-48.

Azad, A.K., Rasul, M.G., Khan, M.M.K., Omri, A., Bhuiya, M.M.K. and Hazrat, M.A., 2014. Modelling of renewable energy economy in Australia. Energy Procedia, 61, pp.1902-1906.

Ball, L., Jalles, J.T. and Loungani, P., 2015. Do forecasters believe in Okun’s Law? An assessment of unemployment and output forecasts. International Journal of Forecasting, 31(1), pp.176-184.

Borio, C., 2014. The financial cycle and macroeconomics: What have we learnt?. Journal of Banking & Finance, 45, pp.182-198.

Carvalho, P., 2015. Youth unemployment in Australia. Policy: A Journal of Public Policy and Ideas, 31(4), p.36.

Freebairn, J., 2015. Mining booms and the exchange rate. Australian Journal of Agricultural and Resource Economics, 59(4), pp.533-548.

Gillitzer, C. and Simon, J., 2015. Inflation Targeting: A Victim of Its Own Success?. International Journal of Central Banking, 11(4), pp.259-287.

Goodwin, N., Harris, J.M., Nelson, J.A., Roach, B. and Torras, M., 2015. Macroeconomics in context. Routledge.

Hamilton, J.D., Harris, E.S., Hatzius, J. and West, K.D., 2016. The equilibrium real funds rate: Past, present, and future. IMF Economic Review, 64(4), pp.660-707.

Holston, K., Laubach, T. and Williams, J.C., 2017. Measuring the natural rate of interest: International trends and determinants. Journal of International Economics, 108, pp.S59-S75.

Johnson, H.G., 2017. Macroeconomics and monetary theory. Routledge.

Mankiw, N.G., 2014. Principles of macroeconomics. Cengage Learning.

McCombie, J. and Thirlwall, A.P., 2016. Economic growth and the balance-of-payments constraint. Springer.

Saha, S. and Zhang, Z., 2016. Exchange rate pass-through and inflation in Australia, China and India: A comparative study with disaggregated data. Journal of Economic Research, 21(1), pp.1-33.

Setterfield, M. ed., 2016. Growth, Employment and Inflation: Essays in Honour of John Cornwall. Springer.

Tung, L.T. and Thanh, P.T., 2015. Threshold in the relationship between inflation and economic growth: Empirical evidence in Vietnam. Asian Social Science, 11(10), p.105.

Data Source

Data.worldbank.org. (2018). Official exchange rate (LCU per US$, period average) | Data. [online] Available at: <https://data.worldbank.org/indicator/PA.NUS.FCRF?locations=AU> [Accessed 19 May 2018].

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