Examination Of Commodity Price Fall On Australian Economy And RBA’s Policy Formulation

Problem Statement

Problem Statement

It has been identified that just when Australian economy is showing few tentative signs of improved conditions, a series of threats alongside have appeared to doom the burgeoning positive outlook. Makin (2013) mentioned that while the marketers in Australia are spending a lot of time at the positive appeared signs in the labour market, retails, spending from governmental side and commodity price is falling unexpectedly. Sheehan and Gregory (2013) particularly mentioned that Bloomberg Commodity index had decreased 7.21 percent since the first quarter of the last year. It is worth mentioning that this decreasing status in exports and a significant fall in the commodity price appears as alarming for Australian economy. Another significant concern giving severe is anxiety is that resource and energy sector is attached to see the record a burgeoning export earnings but this is forecasted to be temporary or short-lived. Nonetheless, Anderson and Strutt (2014) arguably mentioned the fact that the major concern of Australia its government is well contained bond which is country’s traditional practice but its improvement creates dark environment in which expansion of global economy is limited in the coming years. Under such scenario, banking industry in Australia one such sector can be taken into account as banks delay any sort of monetary tightening, RBA gains the benefits from the increase in the interest rate for the last five years.

In addition to the above mentioned fact, a relatively strong Australian dollar could result in a negative way especially on the exports. However, Rees, Smith and Hall (2016) argued the fact that Australia is in a much better position in the global economic outlook as the revenue sources that government finds is able for until the last quarter of the year.

Nonetheless, the fact is that to hold the position as the largest commodity export market in Australia, decrease in industry commodity price such as iron ore and oil turn out to be the sport price of oil (Simshauser & Nelson, 2013). It has also been identified that trade war is most likely to minimize the oil price in a demand-driven cycle and for the nation like Australia, this is a big concern a bulk of fuel is being exported from Australia, so chances are that importer nations across the world could be profitable from such oil shock. Thus, taking such facts into account, the proposed study investigates the way in which decrease in the commodity could result in economic downturn in Australia and the way the RBA could enhance the weightage of its policy infrastructure. Apart from this primary concerns, the study is also determined to forecast the future consequence of the fall in Australian economy.

Aim and Objectives/ Research Questions

Aim and Objectives/ Research Questions 

The study aims at examining the commodity price fall on Australian economy and RBA’s process of formulating policies to deal with this economic downturn. The secondary aim of the study is to investigate export products and their status in global market. The following are the key objectives to meet the objectives

• To determine the current rate of commodity price fall in Australia
• To determine the impact of commodity price fall on Australian economy
• To determine the factors, result in commodity price fall in Australia
• To examine the RBA policy during the low inflation time in Australia

Research Questions

What is the current rate of commodity rate of price fall in Australia?

• What is the overall impact of commodity price fall on Australian economy?
• How does RBA formulate its policies at the time of low inflation in Australia?

The research aims and questions are decidedly relevant to the context of the topic because undoubtedly, Australian economy is always in stable position and it is positively enhancing but a sudden commodity price fall is a significant concern which is rather a mismatch of pictures of existing economy. So, alongside it is important to know how Reserve Bank of Australia is revising or formulating their policies to deal with such downturn. It is really important to unveil how the sudden commodity price fall in an economy which always holds positive outlook and this also creates the urge of investigating the factors that cause the fall in the commodity price.
 

Once the factors are learnt, a new insight about the resolution can be developed and on the other side, if the process that RBA used to formulate policy and deal the economic odds are known, better solutions for the future dilemma can be developed and categorized. So, the proposed study is supposed to unfold the crucial factors which cause the commodity price fall and this knowledge can be treated as an opportunity to push away the consequences of the factors, while the process of formulating the policies can be enhanced. In addition, the proposed research work contributes to development of knowledge regarding the behaviour of Australian economy and sectors which suffers from such behaviours. The study also contributes to development of knowledge about global impact of Australian economy. Outcome of the proposed research work can be used as the guidance for marketers who are determined to expand in Australian market.

Rate of Australian commodity price fall

When it comes to the decrease in commodity price fall, Knop and Vespignani (2014) to find the sequence of commodity price fall, mentioned about the fact that in 2008, house prices have decreased the most in single market. So, if this fact is taken into account, comparison with the peak of 2017 is worth mentioning according to authors, as Sydney and Melbourne’s house prices have now dropped 11.1% as well as 7.2% respectively and moreover, a sharp fall in December quarter is an indication that the decline is taking its forms.

Conceptual Framework of the Research (Review of Literature)

 Plumb and Bishop (2013)  mentioned that a fall of 4.8% in price in 2018 pushing the large banking organization like Deutsche Bank to scrutinize a potential housing threat as one of the potential risk to global economy. Bjornland and Thorsrud (2014) particularly mentioned that Sydney’s house price surged nearly 20% in 12 months between 2016 and 2017 and a national capital increase of 12.9% has also been observed. Nevertheless, Meng, Siriwardana and McNeill (2013) mentioned a bit different picture in as the last year presented a long slide intertwined with the price fall in Sydney of 8.9% and a fall of 7% in Melbourne. The following picture derived from above mentioned article shows annual changes in dwelling values.

Figure 1: Annual Change in dwelling values

(Source: Meng, Siriwardana & McNeill, 2013)

However, Alom, Ward and Hu (2013) commented that financial regulator Apra’s tightening of lending criteria is one of the factor for the drop. On the other side, Manalo, Perera and Rees (2015) commented that most of the regions across Australia have reacted to tighter credit conditions by keeping a record of weaker housing market results. Nonetheless, when it is considered on a sub-urban level, the largest yearly falls in Sydney were in Ryde (13.3%) and the inner south is around (10.5%). Scrimgeour (2014) mentioned the fact that downturn has influenced several global economist to list Australian markets as a significant risk.

Business Investment

The cycle in bulk commodity price as well as mining investment since the middle of 2000s have fairly been linked. Meng, Siriwardana and McNeill (2013), the initial growth and expansion of mining capacity as the response to increase in commodity prices required a significant increase in spending on construction, equipment and machinery. Consequently, as the global production expanded to an increased level equally with the increase of demand, prices ultimately declined as well as incentives for further investment diminished. After the contribution to Australian GDP growth as commodity price rose, mining investment has subtracted from growths since the last quarter of 2016. On the other side, Manalo, Perera and Rees (2015) mentioned that organizations that are mining bulk commodities in Australia had a perspective that price would decline, they already had a limited commitments for proposed investment prior to recent occurrence of price decline. Nevertheless, Knop and Vespignani (2014) mentioned that as the decline in commodity price and the great amount of profits of mining companies, investment related to mining might have declined by more than it would. Authors of this study has also mentioned the fact that Bank’s liaison program hints that several producers have responded by minimizing the spending aimed at maintaining their mines as well as have embarked on the cost cutting measures. In contrast, for non-mining business investment, the effect of declines particularly in bulk commodity prices tend to operate partially through the associated cost exchange rate (Anderson & Strutt, 2014).  

Rate of Australian Commodity Price Fall

Net Exports

According to Makin (2013) the increase in mining capacity caused by initial rise in commodity price result in strong growth in the volume of exports of resources-mostly in the recent years.  Authors also mentioned the fact that subsequent declines of price have so far had the little impact on export volumes; this is because most Australian production was benefited. Sheehan and Gregory (2013) mentioned about some less profitable mines closing down over the past year, especially in the coal sector. Authors estimate the fact that such disclosure could be possible if price remain at current range for an extended period of decline in the coming days. Rees, Smith and Hall (2016) arguably mentioned the fact that while the exports of bulk commodities are estimated to remain in place and grow over next few years due to the chances of additional capacity, the pace of growth is estimated to remain in moderate stage. On the contrary, Simshauser and Nelson (2013) mentioned that non-resources export volume are being sustained by limited exchange rate via the associated enhancement to competitiveness. 

Public Demand

Plumb, Kent and Bishop (2013) mentioned that Australian Government as well as some state governments tend to collect significant revenue from production as well as sale of bulk commodities. According to the author, especially for Queensland and West Australia, which has significant endowment of bulk commodities, the revenue could take the form of royalties, which is tied directly to the market value of production. Bjornland and Thorsrud (2014) mentioned that initiatives and movements in commodity price could create impact on capital gains as well as personal income tax via the effect on the share price of mining organizations and workers’ wages.

How does RBA deals with fall in commodity price

According to Meng, Siriwardana and McNeill (2013), monetary policy aims to keep inflation between 2 to 3% percentage over time, in response to the support of Reserve Banks’ objective of price stability and full employment.  Authors of this study has particularly mentioned the fact that assessing the current and expected rate of inflation of against the inflation target  could help Reserve Bank in making monetary policy dimensions. This means when the inflation remains above the target, this hints the economy is overheating. Thereby, when the inflation remain under the target, this can be another sign, there is a spare capacity in the economy. In response to above statement (Manalo,  Perera and Rees, 2015), mentioned that cash rate thereafter can be used to dampen or stimulate economic activity; thereby, the inflation is consistent with the targets. According to Scrimgeour (2014) if the inflation is expected to be higher than target for a long period, Reserve Bank could characteristically enhance the cash rate. Authors of this study has also mentioned the fact that changes in the cash rate could take time to affect economy. Therefore, Reserve Bank focuses on the inflation what seems to remain in the future when doing on the range of the cash rate in the present day.

Factors Causing the Fall in Commodity Price in Australia

H₀-Commodity price fall has no impact on Australian Economy

H₁-Commodity price fall has impact on Australian Economy 

Methodology determines the eventual outcome of the research and it guide researcher to fix the complexities in performing the research work (Neuman, 2013). Thus, it is highly important to apply the methods appropriately. The major issue that study is investigating is the commodity price fall and its impact on the economy; thereby, to learn the impact, research approaches should be applied appropriately. Following research techniques are considered to be applied to gain desired outcome from the study.

Research Approach and Source of data

In order to investigate the impact of commodity price fall in Australian economy and RBA’s policy initiatives towards the inflation, the proposed study will use a mixed approach in which both quantitative and qualitative data collection methods will be used. This means both primary and secondary data will be collected to perform the analysis.

Primary Data

As primary data is fresh and first hand in nature, primary data should be collected performing an interview method (Mackey & Gass, 2015). Hence, primary data is required to analyse the current economic situation of Australia with respect to the changes commodity price. Hence, primary data is required to contrast the findings gathered from the existing research papers.   

Secondary Data

Secondary data is the data which has already been used and published in journal articles, books and blogs (Panneerselvam, 2014). Thus, in order to learn and analyse the factors causing commodity price fall, secondary is required. Thus, in the proposed study secondary will be collected from books, journal articles and financial blogs.

Data collection is a technique which helps to collect information from all relevant sources to find responses of the problems, test hypothesis and assess the outcomes (Lewis, 2015). Data collection methods are usually divided into different sections namely primary and secondary data collection. Primary data collection is further divided into two different sections quantitative and qualitative. In the proposed study, for collecting qualitative data, an interview method will be applied.

Interview: In order to perform the interview method, few key economy professors will be interviewed along with some industry experts to learn about the trends and whether this price fall is tough to deal with in the coming future.  Interview method will be applied on the basis of sampling method.

Sampling method: There are two different types of sampling methods namely probability sampling and non-probability sampling method (Flick, 2015).  However, in the proposed study, non-probability sampling method will be used because it is highly important to engage the individuals who have experiences about the behaviours of Australian economy. Moreover, it is important to know the availability of the respondents who are supposed to be engaged in the interview process. Thus, considering this fact, non-probability convenient sampling method will be applied.

Data Analysis techniques 

First the collected data will be converted to a meaningful context to interpret them in suitably. Raw data will be converted to digits and percentage to denote the facts. However, data analysis tools such as SPSS and other statistical tools will be used to analyse the data conveniently. Moreover, as the interview method data will be applied to the study, it is wise to content analysis method. This means that content analysis method will be used to categorize both verbal and behavioural to classify, summarize and tabulate them. When performing the analysis, the data will be presented in table and graphs to denote impact of the facts found in relation to Australian economy and commodity price fall. In addition to this, when performing the analysis, data findings will be compared to the finding found in the existing papers used in the literature review section of the study. 

Research Setting and Instrument (Organization of the study)

As the study is required to perform interview method, it is important to prepare questionnaire. The questionnaire will include five to six open-ended research questions. Interview method will also include semi-structured process; thereby questionnaire will include also include the questions of semi-structured interview. Questionnaire will be prepared based on the number of respondents taking part in the interview method. In addition to this, questionnaire will be distributed and sent to respondents through their personal email. However, it is important to take note of personal information; thus, appropriate ethical orders will be will be followed to access the personal information of the respondents.

Organization of the study

Proposed research based on three major aspects starting with the formulation of aims and objectives which will be followed throughout the study, meaning based on the objectives review of existing research studies will be done. Secondly, review of literature which is another aspect required to be designed in a perfect way. Thus, review has been done collecting relevant journals covering contemporary issues related to economy behavioural changes in Australia and its emerging impact on parties involved. Thirdly, application of research methods is another aspect required a great attention. Considering the variables of topic such as commodity price fall, methods will be designed and applied

Budgets, Project activities and Grantt chart

References

Alom, F., Ward, B. D., & Hu, B. (2013). Macroeconomic effects of world oil and food price shocks in Asia and Pacific economies: application of SVAR models. OPEC Energy Review, 37(3), 327-372.

Anderson, K., & Strutt, A. (2014). Emerging economies, productivity growth and trade with resource?rich economies by 2030. Australian Journal of Agricultural and Resource Economics, 58(4), 590-606.

Bjornland, H., & Thorsrud, L. (2014). What is the effect of an oil price decrease on the Norwegian economy. Oslo: Norges Bank.

Flick, U. (2015). Introducing research methodology: A beginner’s guide to doing a research project. Sage.

Knop, S. J., & Vespignani, J. L. (2014). The sectorial impact of commodity price shocks in Australia. Economic Modelling, 42, 257-271.

Lewis, S. (2015). Qualitative inquiry and research design: Choosing among five approaches. Health promotion practice, 16(4), 473-475.

Mackey, A., & Gass, S. M. (2015). Second language research: Methodology and design. Routledge.

Makin, A. J. (2013). Commodity prices and the macroeconomy: an extended dependent economy approach. Journal of Asian Economics, 24, 80-88.

Manalo, J., Perera, D., & Rees, D. M. (2015). Exchange rate movements and the Australian economy. Economic Modelling, 47, 53-62.

Meng, S., Siriwardana, M., & McNeill, J. (2013). The environmental and economic impact of the carbon tax in Australia. Environmental and Resource Economics, 54(3), 313-332.

Neuman, W. L. (2013). Social research methods: Qualitative and quantitative approaches. Pearson education.

Panneerselvam, R. (2014). Research methodology. PHI Learning Pvt. Ltd..

Plumb, M., Kent, C., & Bishop, J. (2013). Implications for the Australian economy of strong growth in Asia. Sydney: Reserve Bank of Australia.

Rees, D. M., Smith, P., & Hall, J. (2016). A Multi?sector Model of the Australian Economy. Economic Record, 92(298), 374-408.

Scrimgeour, D. (2014). Commodity price responses to monetary policy surprises. American Journal of Agricultural Economics, 97(1), 88-102.

Sheehan, P., & Gregory, R. G. (2013). The resources boom and economic policy in the long run. Australian Economic Review, 46(2), 121-139.

Simshauser, P., & Nelson, T. (2013). The outlook for residential electricity prices in Australia’s national electricity market in 2020. The Electricity Journal, 26(4), 66-83

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