Macroeconomic Indicators

Australia is an economy enjoying a macroeconomic stability revealed through many indicators. In evaluating the macroeconomic performance of the country, investigation of macroeconomic indicators such as GDP growth, interest, unemployment, CPI, inflation, and exchange rates is crucial. The current figures associated with these indicators when compared to Australian statistics in the 1990s indicate that Australia is performing well from a macroeconomic viewpoint. This healthy performance has been largely contributed to by Australia’s fiscal policy through its numerous budgetary measures. Macroeconomic indicators show not only the country’s economic status but also provide insights into the future of the economy. Australia has implemented some regulatory policies directed towards its trade and import/export regulations which have kept the country in an economic forefront even during the 2008 financial crisis. However, Australia faces serious challenges regarding its working population as a good proportion is aging. Thus, the government of Australia should implement policies that promote macroeconomic stability to ensure a healthy economic status. This paper applies numerous macroeconomic indicators including GDP, export/import, unemployment, and inflation rates to evaluate the macroeconomic performance of Australia and from it, offer a future macroeconomic outlook of the country.

Real Gross Domestic Product (GDP)

GDP growth rate is a key measure of a country’s economic growth. According to the Australian Bureau of Statistics (2016), the real GDP in 1995 was 2.5% and 2.4% in 2016. While GDP is a key indicator of economic strength, GDP per capita indicates the long-term goal of the economy. A significant increase in GDP growth rate per capita indicates that the economy grows at a rate faster than the population and thus increased the standard of living over time (Stock & Watson, 2012). Furthermore, Australia’s labor productivity has also increased from 2010 to 2016 by 1.8% contributing to the better living standards of the citizen (OECD, 2016). According to Australian fiscal policy regarding GDP growth rates, the real GDP is speculated to be 3.1% in 2017 and 3% in 2018. That means that increase in overall demand was not due to government expenditure. During the years before and just after the great financial crisis of 2008, the real GDP was growing at an annual rate of approximately 2.3% faster than its revenue growth resulting in economic sustainability.

Among other sectors, the Australian mining sectors and the service industry are the major contributors to its economy. The abundance of natural resources is an advantage that makes the country more competitive economically. As evident in the GDP growth rate graph, Australia was well placed to maintain a steady economic growth between 2006 and 2012 except during the 2008 financial crisis where it indicated a declined growth of 0.9%. This negative growth is characteristic of a decline in the overall output levels in a time of global crisis (Ohanian & Wright, 2010). During this period, world big economies especially the US were heavily hit. The recession was majorly due to excessive lending encouraged by reduced cost of borrowing by the Federal Reserve (Bhar & Mallik, 2012). The majority of the borrowers invested in real estates making the housing prices to rise rapidly. Since the impact of this adjustment was global, Australia’s output level also declined but was not as worse compared to the US and the UK.

Real Gross Domestic Product (GDP)

The Australian interest rates correlate positively with the global trends of financial markets. Tsiaplias & Lian (2008) define interest rate as the annual percentage rate charged on money borrowed paid to the lender. The rates are usually higher in Australia than other developed nations due to its stronger fiscal policies. The Reserve Bank of Australia determines the rates of interest by altering the money supply to balance its demand (Reserve Bank of Australia, 2017). Although interest rates are viewed negatively, they are important in offering lucrative returns on foreign reserve savings (Carriero, Kapetanios, & Marcellino, 2011). According to these authors, interest rates determine the level of financial influx in a country. From the graphs shown in this section, Australian interest rates were higher than those of the US, Europe, and Japan; countries which experienced relatively higher inflation during the 2008 financial crisis. Furthermore, since a country’s interest rate is defined by the level of inflation, Australia’s tight regulation of inflation rates below 3% since the experience of the 1990s has contributed to its healthy macroeconomic performance (Reserve Bank of Australia, 2017).

The level of poverty in Australia is largely dependent on the rate of unemployment. Although Australia escaped the disastrous financial recession of 2008, it has experienced a constant increase in unemployment rates since 2009 (OECD, 2016). Ohanian & Wright (2010) define unemployment rate as the percentage workforce that is unemployed and actively seeking employment. The strong fiscal policy that the country adopted has however harmonized the increasing unemployment rate caused by the global economic recession. Although the adjustment of the working hours reduced job losses, it increased job dissatisfaction and a rapid rise in the rate of youth unemployment (Hubbard, O’Brien, Garnett, & Lewis, 2014).

The current unemployment rate estimated at 6.1% is below the standard unemployment rate of 7.2% (OECD, 2016). Furthermore, according to the OECD (2016) report, the overall unemployment rate in Australia has been consistently below OECD average since 2008. In terms of unemployment fiscal policy, the Australian government has adopted budgetary measures as a way to increase incentives for employers to hire more individuals and encourage job-seeking among the citizens. The unemployment rate is negatively correlated with overall GDP (Bhar & Mallik, 2012). The small increase in the unemployment rate between 2014 and 2016 has slightly decreased the country’s GDP hence decreasing firms’ outputs. This decrease, characterized by increased prices of goods and services has worked to reduce Australia’s inflation rate (Carriero, Kapetanios, & Marcellino, 2011). As such, Australia is likely to continue enjoying economic sustainability for some years to come.

Interest Rates

The consumer price index is a key measure of the changes in prices of goods and services purchased by consumers. This variation is developed using price levels of various products sampled periodically. Because CPI is a major guide for measuring inflation rates, it also determines Australia’s GDP and interest rates which are the key indicators of its stability. If inflation rates are reduced, a larger number of people will take loans to satisfy their needs (Kazi, 2009). Gradually, inflation increases due to the resultant increase in the prices of goods and services. Australia attempts to maintain inflation rate between 2 to 3% in order to adjust the consumer price index (Australian Bureau of Statistics, 2017). However, these figures may fluctuate depending on situations such as changes in food prices, accommodation, and domestic travel. Since Australian CPI is determined on the basis of inflation, the figures appear more transparent and can thus be used to offer a more accurate speculation of the financial market changes.

A country’s exchange rate determines the purchasing power of its currency relative to another currency. The Australian exchange rate was loosened in 1990 due to the growing external financial deficit and the rise in cash flows under the regime of fixed exchange rate (Macfarlane, 1998). In order to address the growing financial deficit that had developed in the early 1990s, Australia introduced various fiscal policies most of which were budgetary measures to maintain fiscal consolidation (Gizycki & Philip, 2000). Like any demand and supply framework for products, the exchange rate is calculated in a capital market by the same forces affecting demand and supply. According to Cespedes & Velasco (2012), the exchange rate is determined by several factors including consumer preferences, GDP variations, inflation changes, and interest differentials. A change in the consumer tastes affects the demand and supply aspects of that particular currency which in turn alters its exchange rates. Bhar & Mallik (2012) argue that if a country’s economy grows faster than other countries’, its currency is likely to decline. That is because increased economic growth means a higher level of income which affects the country’s imports.

In terms of imports and exports, trade balances are viewed as a measure of the economic stability of any country and the relationship that particular government has with its trade members. An increase in interest rate increases the value of the currency thus lowering net exports. Of major importance is the trade deficit which shows that current value of the currency of exports is higher than that of imports (Australian Bureau of Statistics, 2016). Generally, trade should cover 25% of a country’s economic activity. However, this is a complex aspect for many countries including Australia because of its high demand for goods.

Unemployment Rate

Australia’s economy depends largely on the exportation of its natural resources such as bauxite, uranium, gold, coal, and iron ore. Australia also exports larger volumes of black coal compared to any other country (Kirchner, 2013). The largest proportion of its exports enters China making China the biggest contributor to its economy. Also, China imports large volumes of wool to Australia at favorable terms compared to any country from Europe (Fenna, 2016). Wool is one of the largely traded commodities in Australia and many companies such as Australian Wool Innovation prefer wool from China to those from Europe, markets that were heavily hit by the global economic recession.

Australia has developed some regulatory policies aimed at strengthening its global economic status. Major policies are focused on international trade issues and export/import regulations. These regulatory reforms together with strong fiscal and monetary policies have enabled Australia to maintain its economic sustainability even during a time of global financial crisis (Hubbard, O’Brien, Garnett, & Lewis, 2014). The sustainability of the country’s economic growth depends on the above discussed macroeconomic indicators that have steadily enhanced its growth since the 1990s. The macroeconomic performance of Australia has been outstanding despite the recent global financial downturn. Strong fiscal policies implemented in both short-term and long-term models are attributed to the healthy performance. Dungey & Pagan (2009) believe that fiscal policies are usually adopted by the government to reduce inflation. On the other hand, monetary policies are implemented by the central bank to help combat inflation. These policies are both used to contain inflation at low levels.

The Reserve Bank of Australia (RBA) monitors the monetary conditions of the country ensuring that it does not rise beyond 3%. Monetary policies are implemented by altering the cash rates in the capital market (Stock & Watson, 2012). In the capital market, cash rate is determined by factors influencing demand and supply for overnight loans. Through liberalized markets, the RBA can alter cash rates by changing the fund supply that banks use to enhance their transactions. For instance, if the RBA intends to lower the cash rates, it can increase transaction settlement funds than the commercial banks can hold leading the banks to offload some of their funds (Hubbard, O’Brien, Garnett, & Lewis, 2014). By altering cash rates, the RBA can manipulate interest rates across financial markets which in turn can affect the country’s economic ability. This move would influence savings, asset prices, investor confidence, and exchange rates. If there is an increase in economic demand evident by rising prices, the RBA can strengthen monetary policy to combat the growing demand. Fenna (2016) believes that monetary policy can influence the macroeconomic performance even when interest rates are kept constant.

Consumer Price Index (CPI)

The fiscal policy is aimed at harmonizing of national budget deficits over a financial cycle. This policy promotes a positive macroeconomic performance as it motivates the country’s investors and consumers (Australian Bureau of Statistics, 2017). For instance, through strong fiscal policies adopted in the 1990s, Australia improved its economic wellbeing to the extent that it avoided the 2008 economic downturn that affected most of the developed nations. Furthermore, the current fiscal policies are directed towards reviewing the budgetary measures while controlling the Australian government expenditure (Reserve Bank of Australia, 2017). Over the last decade, the Australia’s impressive macroeconomic performance has also been due to the strengthening of its dollar. Also, the impressive economic growth seeks to balance the country’s current unemployment rates thus the living standards of its population.

The consistent economic growth can only be maintained through low unemployment and inflation rates. These expectations can be well supported by strong fiscal and monetary policies. The fiscal policy mainly affects employment and the economic activity in a country. The government often maintains budget balances by taking into account financial risks, adequacy in national savings, the financial impact of policy reforms, and tax systems to achieve a feasible economic growth that will reduce the unemployment rate (Australian Bureau of Statistics, 2017). The government emphasizes on the policies that raise the workforce participation. Some of the policy decisions are the recent reforms in labor markets as a way to enhance workforce flexibility and the introduction of the tax incentives for old people (Fraser, 2015).

The fiscal policy applies to government expenditure, the extent and forms of government taxes, and level of government borrowing. Directly, the government can influence economic performance through constant capital expenditure and indirectly through taxes on private expenditures and net exports (Australian Bureau of Statistics, 2016). Currently, fiscal policy is the only macroeconomic policy regulated by the government directly. As such, this policy can reveal discretionary measures adopted by the government to control overall demand by lowering taxes or increasing public spending.

In Australia, the global financial recession of 2008 was also experienced though not as disastrous as in the US. During this period, millions of jobs were lost because most companies had decided to cut their costs (Dungey & Pagan, 2009). In response, the government of Australia has been looking to review previous employment policies in order to align them with the current demands. This review has been promoted by the government’s need to drive the economy towards increased hiring and job-seeking. Despite these efforts, Australia faces a serious challenge due to its aging population (Fraser, 2015). An aging population is a barrier to economic development because it increases the dependency ratio of a country. According to Fraser (2015), high dependency ratio means that the small proportion of the working population carry the burden of meeting the needs of an aging population. This challenge is, however, being addressed by the development of sustainable measures to raise productivity.

Exchange Rate

The remarkable economic stability currently enjoyed by Australia largely comes from sustainable trade and investment decisions. Over 5 million of jobs in the Australian economy come from import and export trade (Australian Bureau of Statistics, 2016). The majority of the country’s exports are derived from mining. As such, mining is the main stimulator of economic growth as it not only offers employment opportunities but also promotes Australian foreign trade (Cespedes & Velasco, 2012). The main function of the trade policy is to eliminate trade barriers. Since trade barriers limit the mobility of products between states, elimination of such obstacles promotes the growth of the economy leading to macroeconomic stability. Through the consensus with the World Trade Organization (WTO), Australia has been focusing on trade liberalization to facilitate easy movement of goods and services between its trade partners (Aidt & Tzannatos, 2008). Furthermore, through this consensus, the country has been able to promote export subsidies for the agricultural sector. That has helped to improve agricultural produce and hence government revenues.

Being a member state of Asia-Pacific Economic Cooperation (APEC), Australia seeks to promote cooperation as a way to spur economic growth (Australian Bureau of Statistics, 2016).  APEC is an economic block that aims to eliminate trade barriers and promote free trade in the large region of Asia Pacific. Because a country’s macroeconomic stability is never sustainable without a secure business environment, the move to join the APEC is an evident driver for economic growth. However, since Australia has not limited its trade to only Asia, it is constantly engaging with major international players to widen markets for its industrial and agricultural produce. Furthermore, this move offers a positive environment for investments (Australian Bureau of Statistics, 2017). For instance, its trade agreements with countries such as New Zealand and the United States has opened markets for trade and encouraged investment between the countries.

Conclusion

Australia continues to enjoy a remarkable macroeconomic performance due to its strong macroeconomic policies and trade. The GDP growth dropped slightly in 2010 as consumers became more cautious following the 2008 economic recession. Other sectors appear to loosen with the strong exchange rates facilitated by the mining tradable sectors. The Australian GDP growth strengthened in 2015 and the macroeconomic outlook is positive despite the numerous risks associated with the price index and labor force. Australia’s current account limits reveal both insufficient public saving and lower overall return on investment. Through its fiscal policy framework, the government of Australia is seeking to address this problem by providing incentives to national saving. The practical aspect of this sustainable fiscal policy is likely to be reflected over time with the ability of the economy to contain a rapid economic growth than would be expected.

According to the graphs and discussions above, Australia has had a good macroeconomic performance largely due to its strong fiscal policies. This performance has stabilized unemployment rates and kept inflation at relatively low rates thus improving the living standards of Australians. Despite this good performance, the country faces a serious challenge with the aggregate prices of its products. The country’s terms of trade have been crippled mainly by the high prices of its goods and services. Also, Australian labor supply is likely to reduce greatly in the coming years because a good proportion of the population is aging rapidly. The effect of this change will be reduced productivity which in turn would increase the average prices of goods and services.

As a way to address these challenges, the government of Australia should develop its learning and training facilities to improve the skills of its labor force. That will ensure maximum utilization of human capital. In terms of efficiency, the government needs to enhance sectoral collaboration to improve the overall performance. Finally, the current fiscal policies aimed at promoting infrastructural development should be enhanced because they provide avenues for employment and enhance economic growth. In the same way, monetary policies should be closely monitored to ensure that not only inflation rate is regulated but macroeconomic stability is kept in check as well. In general, GDP growth, inflation, unemployment, and interest rates are crucial macroeconomic indicators revealing a strong Australian economic performance in combination with government fiscal policy in the current financial market.

The solid support for the fiscal policy in Australia helps to stabilize the government debt ratio over the business cycle. Because of the stable government debt, Australia can easily restore its financial budget after an economic downturn. However, the fiscal decline in overall demand will require a more comprehensive monetary policy in the coming years. Further reductions in the interest rates will follow if the government focuses mainly on the budgetary measures to address macroeconomic issues. The maintenance of a stable economic environment in Australia even after the 2008 economic depression has helped to contain the country’s economy although there are challenges arising from unintended inflation externalities (Bhar & Mallik, 2012). The attempts made to address such challenges have gradually led to short-term recessions. That has, in turn, affected the continuance of economic growth. The foundation of this problem is the comprehensive failure of the policy (Kirchner, 2013). However, the dynamic economic outlook would affect the confidence of the investors and consumers and their desire to participate in any form of structural shift. In addition, changes in fiscal policy and uncertainty about future inflation have contributed to relatively higher real interest rates leading to distorted investment patterns. Low inflation characterizes the current economic cycle. Monetary policy is conducted on a more strategic level with the desire to align principal inflation rates with the RBA’s average rate of 2 to 3%.

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