Macroeconomic Performance Of Australia: A Critical Analysis

Critically analyse and evaluate the macroeconomic performance of Australia.

Discussion

Australian economy is a developed economy and it stands as one of the largest economy in the world. Australia also considered as one of the wealthiest nation in the world. The economy considered as 14^th largest in terms of national GDP, 20^th largest with respect to purchasing power parity and 25^th largest as exporter of goods and finally 20^th largest with respect to importer of goods. Australian economy previously was dominated by mining sector and the reason was due to large level of availability of natural resources and this availability due to location of the economy, but over the years the scenario changed the economy which was run by the mining sector, now dominated by the service sector and this was due to decline in mining sector (Downes, Hanslow and Tulip, 2014).

USA economy is considered as world’s largest economy. In terms of purchasing power parity economy stands in the second position .In terms of GDP economy is 7^th highest with compared to other nations. Economy of USA is a mixed one and has maintained GDP with stability over the past decades. With respect to availability of natural resources the economy stands in highest position. Production level of the economy is also high for which economy has been able to achieve its desired goal over the years (Summers, 2014).

Now if the economy of Australia is compared to USA then a rigid result can be obtained regarding in their terms of growth. The aim of this report is to explore whether Australian economy changes due to changes in USA’s real GDP. The reason behind investigating this kind of study because Australia and USA are trading economies and trade with each other, however Australian economy is much smaller than USA. Yet the study is a relevant one because both economies are very important to be researched.

The study mainly aims to compare and contrast and evaluate the results obtained. For comparing the two economies, some of the significant factors are considered in this study they are related to real GDP growth rates, yearly exchange rate movements, net exports growth rate and interest rate. After comparing these factors of both economies they are evaluated to reach the result.

Over the years Australian economy and USA economy has changed a lot. With respect to development, both economies have shown development in terms of various indicators and these indicators in turn have shown its impact on countries development process. With development, both economies have participated in trade with each country which has contributed towards the growth of each economy. Both economies are diversified one as they comprises of both negative and positive side. Back in 1945 U.S proposed a free trade agreement to Australia. Later, in 1980 both the countries initiated free trade agreement. Free trade agreement lays conditions regarding types of goods to be traded that are subject to non discretionary treatment.

Real GDP growth of Australia and USA

The purpose of this report is to provide an understanding of Australian economy if affected due to changes in real GDP of USA. Time period chosen for this report is 1985 to 2015. To reach the result four aspects are considered and detailed study is provided below.

GDP growth rate generally shows the economy’s growing pattern. This pattern is measured by comparing one quarter of country’s GDP to its previous quarter. GDP mainly comprises of four components and these four components are – personal consumption and this includes retail sales, the second component is business investment and it includes construction and inventory levels, the third component is the government spending and it is largest categories include social security, Medicare benefits and defense spending and finally last and the fourth component is net trade which shows import and export of goods and services (Gordon, 2012).

Growth rate of GDP is regarded as an important indicator of economic health. This rate is sensitive to four phases of business cycle which incorporates: expansion, peak, contraction and trough. Thus considering GDP growth rate gives significant insights about the results that are required for this particular study.

The GDP growth rate of Australia and USA is considered over the period from 1985 to 2015. Various events happened in both the countries during this period and these events affected the GDP growth rate in a significant way. The graph is plotted by considering dataset from World Bank reports. Time period used is specific as it will show the impact of GDP growth of both the economies in clear way. This time gap of thirty years is quite significant to capture the effect.

Graph 1: Gross domestic product over the years

Source: (Data.worldbank.org, 2017)

The above graph shows GDP growth rate of Australia and USA. Graph shows that GDP trends of both countries are discrete one, and this trend is applicable to all countries, but if these two countries under consideration are particularly considered then it can be observed that trend of GDP for USA is far more discontinuous as compared to Australia. If the study of period is divided into three distinct periods then each consist of ten years then it will be easier to get overview of GDP in both countries. Time period can be divided as- 1985 to 1995, 1995 to 2005 and finally 2005 to 2015.

From 1985 to 1995 it can be observed that during this period GDP growth of Australia and USA is not much different from each year. Result even shows that in some years both the countries have recorded same GDP growth rate. The period of 1991 shows that both countries recorded negative GDP rate but the degree of negativity is much higher in Australia than that of USA. This negative result was mainly due to recession that occurred globally during that period. Now if the period from 1995 to 2005 is considered it can be observed that there are some periods where Australian GDP recorded higher than that of USA, more or less two countries recorded same GDP growth rate. Finally if the period from 2005 to 2015 is considered then it can be observed that Australian GDP remained consistent over the years not much growth achieved in terms of GDP but the USA’s GDP for the year’s 2008 to 2009 shows negative result and this result was the outcome of recession in USA. This result shows that negative GDP growth rate does not affected growth rate of GDP in Australia. Thus it can be observed that in terms of GDP, if there is negative GDP in USA it will not affect the Australian economy (Data.worldbank.org, 2017).

Yearly Exchange rate movement in Australia and USA

Buying and selling of foreign currencies on world currency market shows the actual exchange rate. Forces of demand and supply in this domain of exchange rate, works as invisible force and this force mainly determine the price of currency. Exchange rate mainly manipulates interest rates, inflation rate and others. Exchange rate is often considered as the most significant determinant of a country’s level of economic health (Berganza and Broto, 2012). Country’s level of trade is also influenced by exchange rates. Thus it is an economic measure that is manipulated by government. Exchange rate is related to trading relationship between two countries. There are various factors that influence exchange rate and these are-fluctuating inflation rate, interest rates, current account deficits, public debt, terms of trade and political situation.

The exchange rate of two countries Australia and USA is considered , here exchange rate of Australia shown with respect to USA, this is due to exchange rates are pegged to dollar which is the currency of USA.

Graph 2: Yearly Exchange rate of Australia with respect to USA

Source: (theOECD, 2017)

The above graph shows the movement of exchange rate in Australia over the years 1985 to 2015.  The result shows that currency fluctuation is mainly outcome of floating exchange rate system. If USA currency depreciates then it affects the Australian economy, and this is mainly due to US exporter has remained competitive in international market. However, if currency is stronger then it will reduce the export competitiveness and makes import cheaper for which trade deficit can occur. This is the reason Australian investors invest in USA with a view to get greater return from the investment. Recently it is observed from the above graph that depreciation in US currency affects Australia in a much lower level. But the result was somehow much critical back in the 2001, the value of Australian dollar went below US 50 cents. Thus this depreciation allows foreign currencies to buy more goods from Australia. Australian consumers pay more for imported goods. As a result foreign investment also falls in Australia. With an appreciating currency Australia's exports become comparatively more expensive to foreign buyers.

Exports play an important role in any economy; it mainly influences the level of economic growth and balance of payments. Exports volume over the years have increased and this is due to lower transport cost, post globalization, post war period, economies of scale and reduction in tariff.  Export is important for country because it helps several other factors to stabilize the loss of degree. In the domain of employment, economic growth and current account deficit, export helps a lot to overcome the problems faced by these domains (Eichengreen and Gupta, 2013).

Considering the export data of Australia and USA, an overview of both the economies can be obtained from 1985 to 2015.

Graph 3: Export growth rate

Source: (Data.worldbank.org, 2017)

The above graph shows the export of goods and services of Australia and USA. The trend pattern of export follows a discontinuous pattern. If the time period is divided into three phases then the result can be obtained in a significant manner.

The period from 1985 to 1995 shows that volume of export of Australia and USA follows a discrete trend. There are some situations where volume of Australia is far more than that of USA.  During 1989, the volume of export in USA was much higher than Australia. The time period from 1985 to 1995 shows that during 2001, USA export rate become negative and this result was due to recession occurred within the economy. As a result of this recession in USA, influenced Australia because in 2002 both the countries have negative export rate and the degree of negativity of USA was much higher than Australia .Now the period from 2005 to 2015 shows that negative export rate was observed in USA during 2009, but this negative result did not effected the Australian basket of export of goods and services as Australia shows positive growth rate. Thus it can be observed that Australian economy was not much influenced due to USA negative export rate.

Real interest rate mainly shows the interest rate that an investor, saver and lender receive after considering the effect of inflation rate. This concept of real interest rate used in various studies as it determines the phenomena of capital fight, economic bubbles and business cycle. The change in interest rate effect the consumption and saving pattern and they are inversely related.  Thus, capital revolves around market where the interest rate is high (Rachel and Smith, 2015).

U.S Federal Reserve construct interest rate at which they provide loan to banks and this activity is mandatory to set monetary policy. This is the federal fund rate. If this rate is low then bank encourage borrowing and this in turn increases economic activity.

Now with respect to Australia interest rate is called official cash rate and it is Australian base rate. A rise or fall in the cash rate leads to a change in the interest rates for loans mortgages and savings.

Comparison of federal fund rate and cash rate over the years 1985 to 2015 is shown below.

Graph 4: Real interest rate over the years

Source: (Data.worldbank.org, 2017)

The above graph shows the movement of real interest rate of Australia and USA from the period 1985 to 2015.  The period of study if divided into three phases then it is observed that from 1985 to 1995, the real interest rate of Australia was consistently high than that of USA. This shows that level of real interest rate did not affected Australian economy, and the saving of Australian economy was high during this period. Now from 1995 to 2005, it can seen that interest rate decreased in case of Australia while in USA the rate remained more or less same as before. This low rate in interest rate in Australia during this period may be Banks previously did not have competitive interest rates (Claessens and Van Horen, 2015). Also global financial crises resulted in such a result. Finally the period from 2005 to 2015 it can be observed that interest rates in USA decreased at a high level, but in case of Australia the result suggest a discontinuous pattern.

Conclusion

The above analysis on the performance of Australian economy and USA economy over the period from 1985 to 2015 shows that , any changes that is related to USA economy does not affect the performance of Australian economy. With respect to GDP, the performance of USA much better than Australia and this may be due to fiscal policies adopted by USA. The performance with respect to GDP in Australia remained stagnant. Now with respect to exchange rate and export rate, the position of Australia is different from USA and finally with respect to interest rate, both countries show diverse results. Thus analysis shows that USA’s trading with Australia does not affect Australian economy if change occurs in USA. But both the countries performance affected by worldwide events and these events include global financial crisis and recession faced by the countries (Shiller, 2012).

References

Berganza, J.C. and Broto, C., 2012. Flexible inflation targets, forex interventions and exchange rate volatility in emerging countries. Journal of International Money and Finance, 31(2), pp.428-444.

Claessens, S. and Van Horen, N., 2015. The impact of the global financial crisis on banking globalization. IMF Economic Review, 63(4), pp.868-918.

Downes, P.M., Hanslow, K. and Tulip, P., 2014. The effect of the mining boom on the Australian economy.

Eichengreen, B. and Gupta, P., 2013. The real exchange rate and export growth: are services different?

Gordon, R.J., 2012. Is US economic growth over? Faltering innovation confronts the six headwinds (No. w18315). National Bureau of Economic Research.

Rachel, L. and Smith, T., 2015. Secular drivers of the global real interest rate.

Shiller, R.J., 2012. The subprime solution: how today's global financial crisis happened, and what to do about it. Princeton University Press.

Summers, L.H., 2014. US economic prospects: Secular stagnation, hysteresis, and the zero lower bound. Business Economics, 49(2), pp.65-73.