Financial Study International Distinguished Lecture On Australian Economy: Performance And Forecast

Relationship between Australia’s real GDP growth rate and inflation rate

Discuss about the Financial Study International Distinguished Lecture.

Australia is one of the mixed developed economy, which has been going through large amount of transformation since last two decades in its various economic factors. Australia presently has been facing its 27^th consecutive growth year, which has been mainly driven by the strong performance of the mining, agriculture and service sector (Downes et al. 2014). Depending upon the large share of the tertiary and robust performance of the primary sector, Australian economy ranks 1p9^th as per the nominal Gross Domestic Product (GDP) and presently Australia is trying hard to become a sustainable economy that can withstand against the demand or supply side shock in future. Though the Australian GDP growth rate has been fallen in recent years, however, overall GDP value has increased largely depicting the fact that the Australian economy has been evolving as one of the largest economy around the world (Markovic et al. 2016). With considerable amount of employment and job creation, economy of the state has transformed itself largely from where it was during three decades ago. Considering the open market scenario of the Australian economy, it can be seen that the state has recently reduced the gap in exchange rate between Australian dollar (AUD) and US dollar (USD) depicting good trading performance of the state (Rees et al. 2016).

Under this scenario, this report is aimed to discuss the economic performance of the state through utilising the graphical presentation and statistical explanation of the macroeconomic parameters like GDP growth rate, unemployment rate, inflation rate and others. In addition to this, the report will trace, whether the Australian economy has been performing according to the theory of the business cycle or not. Moreover, it will portray the relationship between the Federal Reserve rate and the cash rate of Australia in order to showcase the loanable fund market of the economies and depict a comparison between these two trading partners. Moving forward, the report will provide a forecast for the Australian economy and to conclude the report will give a summarised overview of its findings.  

Inflation and Real GDP are inherently connected with each other. With rise in the Real GDP, there will be fall in the inflation rate as the supply will be higher and the cost of the product will be lower as well (Duarte et al. 2017).

From the figure 1 it can be seen that, whenever there has been rise in the Real GDP of the Australia, inflation has fell. Largest fall in the inflation has been observed during the 1997, when the Australian economy has been facing its highest amount of rise in GDP (Tung and Thanh 2015).

Real GDP growth rate and unemployment rate

Table 1 depicts that the mean inflation in the Australian economy has been 2.73 and it as per the table 2, there has been negative relation between the Real GDP growth rate and the inflation depicting Australian economy has been performing as per the general relation of real GDP growth rate and inflation (Gali 2015).

Table 2: Correlation between the Real GDP growth rate and inflation

Source: (Created by Author)

Unemployment and Real GDP is also connected with each other. As it can be seen that, with rise in the Real GDP, there has been much amount of job creation that reduce the issue of unemployment. Thu, with the rise in Real GDP, there is fall in the unemployment rate (Dosi et al. 2016).

From the above figure it can be seen that, there has been fall in the unemployment rate as he economy increases and vis-à-vis (Sadiku et al. 2015). From the table 3, it can be seen that the mean unemployment rate has been 6.75 for the Australian economy, which is on the higher side compared to the peer countries.

Table 3: Summary statistics of Real GDP growth rate of Australia and unemployment

Source: (Created by Author)

From tale 4, it can be seen that there has been negative relation between the unemployment and the real GDP depicting the phenomenon that with rise in the Real GDP, there will be fall in the unemployment rate by 13% (McCombie and Thirlwall 2016).

Considering the level of association between the Australian Real GDP and the unemployment it can be told that it is one of the key macroeconomic driving parameter that determine the flow of the economy.

Output cycle or the business cycle is the term, which depicts the consistent expansions and contraction of an economy through cyclical process unlike sine wave. Business cycle is distributed in five different stages that define different periods of the economic performance. For instance, business cycle starts with the expansion stage, where the economy grows and then comes the peak, where the economy reaches to its maximum output ability (McGrattan and Prescottt 2014). Post peak, there is recession and after that contraction comes in when the economy faces much amount of loss in its output. Through contraction, there comes the tough session, when economy produces lowest amount of goods and services leading to fall in the overall performance of the economy.

Considering the case of the Australian economy from the perspective of the business cycle, it can be said that the economy has been performing as per the theory of the business cycle. As it can be seen from the figure 3, there has been recession and contraction in the economic output in the state during 1990 to 1991 and then it started to expand again. Through the next 8 years, expansion of the economy continues and during 2000, it reached the peak (Schroeder 2018). Post peak, economy started to fall again and recession comes in. through this economic cycle Australian economic output has been increasing during the last three decades and considering this it can be stated that Australian economy has been performed as per the business cycle (Manalo et al. 2015). Australian business cycles relatively symmetric in terms of both the amplitude and duration during the chosen years and contraction as well as the peak is short lived session of the business cycle.

Evidence of the business cycle

There has been wide array of researches that depict the relationship between the exchange rate and the next export. Though it was introduced by Adam Smith during the 17^th century, yet the relation between the Real exchange rate and the net export still persistent (Farhi and gabaix 2015). As per the general theory, there has been positive relation between the exchange rate change and the change in net export.

From the figure 4, it can be seen that there has been high relationship between the real exchange rate and the net export. With the change in the exchange rate, there has been rigorous change in the net export. From the below table it can be seen that with the rise in the real exchange rate, there has been fall in the net export (Choudhuri and Hakura 2015).

Table 5: Summary statistics of net export and Real exchange rate of Australia

Source: (Created by Author)

Table 6: Correlation between the net export and Real exchange rate of Australia

Source: (Created by Author)

As the table 6 depicts, there has been negative relation between the real exchange rate change and the net export. Thus with the rise in the exchange rate, there will be fall in the net export. As t importable in the US market will be costlier, it will reduce the net export volume with the rise in the inflation and vis-à-vis.

Australian cash rate has historically been driven by the Fed rat. Over the past decades, it has been observed that cash rate has been altered deliberately in order to keep itself align with the Fed rate (Caputo and Herrera 2017). It has provide the Australian economy ability to gain much amount of investment from the foreign investor.

As it can be seen from the figure 5, since 1996, there has been paradigm shift in the Australian cash rate policy and it has tried to maintain a reduced cash rate, however, it has been higher than the Australian economy (Hamilton et al. 2016). Presently cash rate has been rising contrary to this US Fed rate has been falling depicting the strong economic condition of the Australia whereas the US has been going through slump.

Table 7: Summary statistics of Australian Cash rate and Fed rate of US

Source: (Created by Author)

From the table 7, it can be depicted that mean cash rate has always been higher than the Fed rate with the mean of 5.33. Over the years cash rate has been moving between 5.33 and 5.18, whereas the Fed rate has remained 3.95 to 3.71. Thus it can be said that the Australian economy has been utilising the cash rate in order to gain much amount of foreign interest and in this endeavour it has been successful through keeping a higher interest rate (Rey 2016).

There has been good amount of association between the cash rate and the Fed rate. As it can be seen from the table 8, with correlation of 0.38, if there is rise in Fed rate, then cash rate will also rise.

Table 8: Correlation between the Australian Cash rate and US Fed rate

Source: (Created by Author)

On the other hand, if the Fed rate falls, then there will be fall in the cash rate as well in order to keeping itself aligned with the US interest rate.

In order to forecast the economic performance of the Australia in the coming days, it can be entailed that presently the Australian economy has been going through its 27^th consecutive growth year. Recently there has been rapid boom in the mining industry as well as the agricultural sector of the state (Cooke et al. 2016). With falling gap between the AUD and the USD is making the Australian economy stronger than ever. In order to depict the future forecast of Australian economy, table 9 can be considered, where the correlation between the various macroeconomic variables of the Australian economy has been depicted. Utilising the table, forecasting can be done because it depicts the relation between the growth and its impact on these parameters.

 Table 9: Correlation between the various macroeconomic parameters of Australia

Source: (Created by Author)

From the above table it can be seen that with rise in the Real GDP of the state, there has been fall in the unemployment rate and additionally rise in the Real GDP enhance the net export depicting reduced inflation rate in future (Bullard 2017). Thus, as the economy of Australia evolve over time, it will face higher amount of trade balance with the rise in export, it will eventually reduce the inflation and the unemployment rate of the Australian economy. Moving forward it can be seen that as there has been rise in the Fed rate, there will be rise in Real GDP of the Australian economy marginally and on the other hand it will enhance the level of unemployment as well as inflation to rise (Howden and Zammit 2018). Considering this it can be entailed that if the Australian economy can hold its present pace and revise its cash rate over time keeping aligned itself with the Fed rate, Australian economy has potential to become one of the largest economy around the world. If the government fails to breach the gap between the AUD and the USD, which is being widening due to the rise in the Fed rate, it will allow the economy to face lower amount of trade balance. In addition to this it has been found that there is very little scope of Australia being facing the recession soon due to its strong mining industry and the robust performance of the agricultural sector.

Conclusion:

From the above discussion it has been found that Australian economy is one of the largest mixed economy that has been going through large amount of growth during the last three decades. From the analysis of the Real GDP of the stat and the various other macroeconomic parameters of the Australia it can be seen that the state has been performing pretty well during the recent years. Though there has been rise in dangers due to the rise in the gap between the US economy and the Australian economy, yet the recent governmental plans to keep the cash rate unchanged has aided the economy to become stabile through gaining much amount of consumer confidence on the market. To conclude it can be said that Australian economy has high potential to become one of the largest economy around the world if it holds its current pace of growth.

Reference:

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