Business Cycle Properties and Macro Forecasting of the Australian Economy - Case Study Example

1.0 Introduction Australia is the fourteenth largest economy worldwide, with GDP of U$755.1 billion in 2009 (IMF, 2009). The GDP declined by 25.3% in 2008-2009 (IMF, 2009). The nation has developed into super power in past 1-2 centuries. In 1900, the gross domestic product stood at US$419 million which increased to US$593 billion by 1999 (Australian Bureau of Statistics, 2001). There has been enormous development in the gross fixed capital formation related to Australian economy which increased from US$55 million to US$141 billion by end of 20th century (1900-1999). Thus it could be seen that Australia is one of the richest and strongest economies worldwide. The GDP per capital has been stable and slightly improved for past decade. In 1999, the GDP per capital stood at US$20,582 increased to US$23,936 in January 2008. On the other hand, gross national income stood at US$3.9 billion in September 1959 increased to US$283 billion by June 2009 (www.abs.gov.au). The net savings in Australia increased from US$497 million to US$129 billion in September 1959-June 2009. It could be seen from the above observation that majority of macroeconomic indicators increased sharply for Australia as nation (www.abs.gov.au). Although majority of national account related economic indicators showed higher growth rates, the miscellaneous indicators or elements such as total earnings across Australia slowly improved to US$312 to US$923 (1959-2009). Unemployment rate has declined slightly from 6.5% in February 1978 to 5.8% in June 2009 (Australian Bureau of Statistics, 2009). On the other hand, the total employed base across Australia stood at 6 million in February 1978 to 10.7 million in June 2009 (www.economagic.com). The Federal fund rate stood at 14% per annum in January 1980 which later on declined to 0.13% per annum by August 2009. On the contrary the exchange rate of Australian dollar to US dollar stood at 1: 0.9175 in December 1983 to 1: 0.8904 in October 2009 (www.abs.gov.au). In 1985, private consumption across Australia stood at 47.7 and increased drastically to 108 in June 2009 (www.abs.gov.au). There has been slightly decline in government bond (10 years) rate per annum from 5.8 to 5.4 (1969-2009). The five year government bond interest rate stood at 5.65 to 5.295 from 1979-2009. In 1969, the consumer price index stood at 17 and have drastically shot up to 167 in August 2009 Australian Bureau of Statistics, 2009). Thus from the above initial brief about diverse macroeconomic elements related to Australian marketspace it could be seen that few elements are procyclical and countercyclical and impact the economic on relative basis. 2.0 Research note point The analysis will try to understand the correlation of diverse macroeconomic elements on Australian GDP and try to analyse the relative impact on the growth prospects. On the other hand, secondary objective is to forecast the growth rates to enhance the overall reliability and validity of the research process. 3.0 Growth Snapshot In this section we would look into the growth rates for macroeconomic indicators to understand the co-relation with economy and state whether the factor is procyclical or countercyclical in the following analysis. 3.1 GDP The Australian GDP has been aggressively growing for the past 1-2 decades attributed to hire farm and non-farm incomes and improved exports and global recognition of Australian farm brands between 1990-2009 (www.abs.gov.au). In 2008, the GDP peaked at 2.2% for April month and has declined by 1% in June 2009 due to economic turmoil. The average growth has been 1.43% (1990-2009). 3.2 Exchange rate The average exchange rate with AU$ and US$ has been 1:0.75 and has aggressively appreciated with time. The average appreciation of AU$ has been 0.1% in 2009. In 2009, the highest appreciation was in 18th June 2009 of 2.3% as compared 17th June 2009. The appreciation has boosted the economic growth or GDP in Australia due to cheaper goods purchase economic thinking in abroad marketspaces (www.marketavenue.cn). On the other hand, Australian economy was boosted by exports and purchase of imports at lower weighted net value on currency basis. 3.3 Private Consumption The average private consumption stood at 86.4 in Australia (1990-2009). There has been marginal growth in private consumption at 0.59% in past 20 years (1990-2009). The decline in consumption expenditure has been mainly driven by slow down in public institutions negatively or directly aligned with Private Corporation across the region (Miller, 2009). 3.4 Consumer Price Index The average consumer price index in Australia stood at 130.3 and has been growing on an average of 0.65% for past 20 years (1990-2009). Thus the consumer price index is aligned with GDP growth in Australia for past 4-5 decades (Frum, 2009). The rise in inflation (average 0.65%) caused the increase in nominal value of GDP (1.43%) between 1990-2009. In majority of duration, ten of thirteen categories in the household contents and services group recorded rise quarter-on-quarter basis (1990-2009). The most significant contributors was furniture (+2.1%) followed by other household supplies (+1.6%) and glassware, tableware (+6.3%). The decline was registered in household appliances (–1.2%) and household cleaning agents (–0.3%) in past 20 years on quarter-on-quarter basis. 3.5 Unemployment rate Australia has average unemployment rates of 7.1% with year-on-year growth of 0.2% for past 20 years (1990-2009). The growth in unemployment was highest between 1990-1993 with average increase to 10.2% (www.hdr.undp.org). This could be seen unemployment and GDP growth could be termed as countercyclical as it is not directly proportionate. 3.6 Federal Fund interest rate There has been aggressive decline in federal fund interest rates in Australia peaking at 20% and declining sharply to 0.13% in August 2009 (www.bankrate.com). The reduction in interest rates is mainly to increase the supply of money by buying government securities. The cut in rates has been due to The Federal Reserve’s response to a potential slow-down by lowering the target federal funds rate during recessions and other periods of lower growth (www.bankrate.com). Thus from the above analysis it could be vaguely seen that few macroeconomic indicators are directly aligned with GDP growth and few have indirectly proportionate. The understanding of procyclical and countercyclical macroeconomic elements will enhance understanding of extrinsic economic environment. Thus in the next section we would highlight on understanding the exact co-relation to enhance the validity and reliability of research note. 4.0 Co-relation Index It could be seen that there is high co-relation between consumer price index and GDP of Australia from 2000-2009. Higher the inflation i.e. cumulative pricing of commodities will have significant impact on gross domestic product. The high co-relation performs the same act and offers the similar statistics. It is procyclical element. Source: Reserve Bank of Australia It could be seen that there is high co-relation between exchange rate fluctuation and GDP of Australia from 2000-2009. High fluctuations will hamper import and export and disrupt the trade deficit and national account balance. The high co-relation performs the same act and offers the similar statistics. It is countercyclical element. Source: Reserve Bank of Australia It could be seen that there is moderate co-relation between private consumption and GDP of Australia from 2000-2009. There was low domestic spending mood between 2000-2004 although the GDP was aggressively expanding. Thus the moderate co-relation persists and the element is countercyclical format. Source: Reserve Bank of Australia It could be seen that there is low-moderate co-relation between Treasury bond interest rate and GDP of Australia from 2000-2009. The Treasury bond interest rate has been stable for past decade and the GDP has sharply increased (www.worldbank.org). Although if treasury bond interest rate would had been decreasing then capital spending should had increased drastically and indirectly impacting the overall GDP. But as the Treasury bond interest rate has been more or less stable but GDP has grow this shows a small-moderate co-relation in Australian case. Thus the moderate co-relation persists and the element is countercyclical format. Source: Reserve Bank of Australia It could be seen that there is moderate-high co-relation between monetary aggregates and GDP of Australia from 2000-2009. The total money available across the nation at particular time was slightly lower than GDP growth rates for the same duration. On the other hand, Australian government increased the production of currency notes and coins by CAGR of 5% (1999-2009). The lower interest rate and cheap availability of cash would have reduced the availability of currency in domestic marketspace. The currency supply increased and enhanced the GDP growth in domestic space. The element is procyclical format. Source: www.conference-board.org 5.0 Forecasting The consumer price index increased by 0.5% in the June 2009 as compared to 0.1% in previous fiscal quarter ending March. In the next 2-3 quarters the consumer price index is stipulated to increase by 0.5-0.7% on quarterly basis due to higher automotive fuel (4.3%), hospital and medical services (4%), residential rents (1.3%), furniture (3.3%) and mortgages (1.3%). The lower capital availability due to subprime mortgage losses will enhance the commodity pricing and ease of purchase. The commercial price index will be slightly offset by lower vegetables (–8%), fruit (–3%), and overseas holiday travel and accommodation (–1%). The decline in few prices is due to better domestic cultivation and harvest across Australia. In June 2009, GDP increased 0.3% and non agricultural GDP increased by 0.5% as compared to last year quarter March. The Australian economy is stipulated to have flat growth rates till March 2010 (+0.8%). This would be mainly attributed to Imports of travel services. The growth in 2010 will be substantiated by Government final consumption expenditure and Household final consumption expenditure both will shoot up by 1%. 6.0 Conclusions On the long-term basis the countercyclical elements have lower negative impact on Australian economy. Australian economy is stipulated to grow at 0.8-1% related to GDP in 2009-2010 due to strong financial institutional backing, higher agriculatural and non-agriculatural output along with improved gross fixed investment scenario. 7.0 References www.worldbank.org www.rba.gov.au www.conference-board.org www.oecd.org www.economagic.com www.bankrate.com www.marketavenue.cn www.hdr.undp.org Miller, Daniel (2009). A Theory of Shopping (paperback). Ithaca, N.Y: Cornell University Press. Frum, David (2009). How We Got Here: The '70s. New York, New York: Basic Books Read More