BUS700 ECONOMICS T224
Shahzaib Shahzad
20019786
Executive Summary
The forecast will examine the Australian macroeconomic performance from 2001 to 2024 with
respect to major categories such as real GDP, nominal GDP, GDP growth rate, consumer price
inflation (CPI), balance of payment BOPs interest rates. It Investigates relationships among the
variables as well compared recent monetary policies with past ones. Charts and correlation
analyses inform the conversation. The recent policy measures involved addressing high
inflation and a slowing economy through expansionary monetary policies. Weighing up the
competing factors, we expect slower growth from here given ongoing interest rate rises and a
more challenging global backdrop; although inflation is likely to recede toward target.
Households should receive significant fiscal support if the situation worsens materially.
1
Table of Contents
Introduction ................................................................................................................................ 3
Australia Macroeconomic Performance .................................................................................... 3
Correlation and GDP Growth .................................................................................................... 3
Relationship between Inflation and Interest Rate ...................................................................... 5
Correlation and Inflation ............................................................................................................ 5
Relationship between Trade and Exchange Rates ..................................................................... 7
Monetary Policy Campaign ....................................................................................................... 8
The Economic Outlook and Policy Recommendations ............................................................. 9
Conclusion ............................................................................................................................... 10
References ................................................................................................................................ 11
2
Introduction
This report assesses Australia macroeconomic performance since 2001 through the key
economic indicators, and an analysis of a current and a past monetary policy. Analysis of
relationships between indicators is done by correlation analysis as well as graphs. Present
problems comprise inflation at the current high levels which requires intervention through
increasing interest rates by RBA is also expounded together with the strong economic growth
in the recent past. New external circumstances may act as negative factors in future
development while inflation will likely decline in the future, this might could be on fiscal
support to households if situation substantially worsens.
Australia Macroeconomic Performance
Annual growth of the GDP, the inflation rate and unemployment rate of Australia from 2001
to 2024 are presented in the Figure 1. From the global cross-section of the GDP, one can draw
that except for the GFC- 08/09, the growth has been a gradual rising around 3% annually. 9%
(ABS, 2024a). Unemployment peaked at 5. while in the period of the GFC it was 9% remaining
for most of the time between 4-6% (RBA, 2024a).
Figure 1:Economic Indicator for Australia
Correlation and GDP Growth
Employing the basic econometric model, correlation between GPD growth and unemployment
equalled minus 0. 57, which suggest that there is moderate level of negative relationship
between the two variables whereby higher growth rate was accompanied by lower
unemployment rates. This is in concordance with the economic theory as explained by Mankiw
3
(2013). Regression of the GDP growth against the inflation improved the value to a negative
0. 29, meaning that growth was not a major factor for price increases.
Subsequently, when the accelerated rate of expansion of mining boom started in the
middle of 2000s then while the GDP was increasing almost 4%, the inflation was still near 2%
even as the international prices of commodities rose steeply (Datt et al., 2021). As the fiscal
stimulus funds and cheap money stimulate domestic demand after the GFC, it was able to
prevent the unemployment rate from increasing significantly even though GDP was declining
(RBA, 2012).
Since 2012 the overall global economic growth has reduced affecting the export and
business investment in Australia (Productivity Commission, 2013). Fiscal consolidation started
which led to the decrease in discretionary spending for the economy. Australia’s RBA lowered
rates dramatically to historic lows in 2011-2016; however sub-par wage growth and high
household debt incumbency provided excessive pressure on consumption (Productivity
Commission, 2018). The Gross Domestic Product expanded little more than 2. 5-3% when
unemployment rose, and temporarily hovered at 4. 7% previously.
Fears of recession were thus averted in Australia during COVID-19 pandemic due to
relevant public health measures as well as the provision of big fiscal stimulus measures (IMF,
2021). The ‘mortgage repayment ‘Holiday’ and the ‘JobKeeper’ wage subsidies stimulated the
total demand during the time other channels of consumption were shut (RBA, 2020). Since
mid-2021 the GDP increased vigorously at the rate of 4% and the rates remained low and the
economy reopened rapidly. Reducing unemployment was visible to present historically low
rates slightly above 4%.
Inflation became high in late 2021 as global supply disruptions limited many key
imports while domestic demand recovered rapidly. In 2023, producer price inflation hit its
highest level in a dozen years, in part due to higher energy prices. Producer prices were
increasing in 2024, with an annual increase of 4-6 percent, nearly twice the 2-3 percent target
midpoint. High inflation was made possible by the tight labour market, with wages rising
steadily to nearly 4 percent in real terms by late 2023.
4
Relationship between Inflation and Interest Rate
The RBA uses interest rates (the 'cash rate target') as a more mainstream monetary policy tool
with which it aims to keep inflation within the band of its (long-run) 2–3% per annum.
Figure 2: annual inflation and cash rates 2001 to date, forecast until June 2024 Inflation
remained close to this range of 1.5-3% for so long that the economy is now often referred to as
"low inflation" (RBA, 2024a), but rates were between around 4 and just above five percent
before the GFC. By late 2008, collapsing commodity prices pushed headline CPI lower towards
1% even with rates especially cut (RBA, 2011). A notable example of this was the mining
investment boom, with ultra-low rates from 2011 helping keep core inflation close to the
Reserve Bank's (RBA) then target band despite weak wages as global growth slowed
(Productivity Commission, 2013).
Figure 2:Annual Inflation Rate of Australia
Correlation and Inflation
Against cash rates, inflation had a moderate correlation of 0.55, suggesting the somewhat
mechanical process through which higher interest costs filter into price pressures would help
cushion some impact on demand and only lift prices moderately. This relationship became
particularly clear after 2016 by which point inflation subsequently rose with rates (RBA,
2024a) suggesting that the RBA is able to affect its main target indicator through controlling
interest rate policy.
5
After mid-2022, and in reaction to soaring inflation between the June 2024 statement
date of early September 2017they raise rates aggressively so as by this Study's commencement
date, August 3 or RBA (2008), interest are at least back on par with neutral levels matching.
Consumer spending and house prices have started to cool as intended ([Commonwealth Bank,
2024]) with higher borrowing costs we suspect will be weighing on confidence but inflation
remains elevated due to global energy and food costs. But the consensus among forecasters is
that core inflation will gradually subside enough by late 2024 to slip back into or at least near
a band of roughly meet-or-beat targets centered on about 2% (Deloitte Access Economics,
NAB (National Australia Bank).
Figure 3:The Regression Analysis performed on Inflation, GDP, Interested rate
Figure 4:The Summary of Residual
6
Figure 5:Summary Continue
Relationship between Trade and Exchange Rates
Australia has an open economy which had its exports and imports each account for 20-25% of
GDP in recent years (World Bank, 2022). Figure 3: Yearly Here (US$)Against US Report
Trade parity and $A trade rates exhaustively from unequivocally the First yet Final years
Testament of Examination Focusing on the exchange rate again, a strong positive correlation
of +0.75 was found for exports and also another 0.75 with imports, confirming that this is in
line with the economic theory you expect to find when fitting the data as strongly as we have
here At the start of each depreciation cycle, exports immediately rise and domestic demand
weakens as imports fall; after appreciations have taken effect which can take four to five years,
on average (Alberola et al. 1999). During 2010-11 the mining boom also coincided with periods
when the $A reached parity or thereabouts against the $US.
Figure 6:Australia Annual Reports
7
Since 2017, the appreciating $A has been also working towards a reduction in net
exports as China's leading softened more gradually (Commonwealth Bank, 2020). It crashed
in 2020 when fear of coronavirus gripped the planet, but has since rebounded back over US70c.
70 (ABS, 2024b). A high level of commodity and energy prices have its lucrative trade surplus
in 2022-23 as well amid supply disruptions. If a weaker global growth profile also undermines
commodity prices and the $A, import costs could be pushed higher to put upward pressure on
inflation (NAB 2024).
Monetary Policy Campaign
After the GFC, the RBA cut rates heavily starting from late 2008 and reaching an
unprecedented low of 3% by June 2012 (RBA,). The deteriorating global economic conditions
also led to large scale government bond purchases a form quantitative easing that represents
both coordination with monetary policy intervention as well expansionary fiscal measures for
creating demand in times of crisis. These unconventional measures were designed to spur
spending and hence inflation, back toward the target range (Citi 2012). At some stage from
2016, on the back of improving domestic growth momentum, the RBA began to make an
attempt at normalising rates while holding a constructive view. While productivity was
weighed down by substantial misallocation (Productivity Commission 2018), low growth in
the nominal wage remained on a persistent trend. Weak global trade weakened export volumes
with price for Australian mineral exports remaining steady (IMF, 2017). The lifting $A also
encountered headwinds that hindered growth in export revenues and consumption overall.
The cash rate was reduced to 0.25% within a month with COVID-19 crisis in 2020,
which pushed mortgage rates lower than ever before when pandemic lockdowns forced large
sectors of the economy into hibernation and spending needed to be propped up (RBA, 2020).
The central banks also turned on emergency liquidity facilities to stabilize the financial system
(RBA, 2022). This was delivered through an unprecedented scale of economic reinforcement
amongst them being a $300 billion direct cash handout and tax relief apparatus to enable
income replacement (Parliament of Australia 2021).
In contrast, Australia went into the present decade with robust growth in the recovery
from the GFC, however began to lose export demand from Asia and government policy
supports were cut by $70bn a year (Grattan Institute 2013). The unemployment rate trended up
to around 6% from 2013-14 partially reflecting waning business investment as mining firms
8
shelved projects after massive investment during the boom (IMF, 2017). Tepid wage growth
persisted because of an oversupply in the labour market that acted to suppress household
purchasing power and headline inflation (RBA, 2014).
The Economic Outlook and Policy Recommendations
Going forward, Australia confronted with the risk of a slowdown in global growth as well as
upward inflationary pressure and an uptrend on world debt servicing cost burden due to
geopolitical uncertainty (IMF 2023). This also serves to illustrate persistently real wage
growth, which in turn kills off living standards and consumption threat (ABS 2023). Leading
indicators suggest a weaker trend and an increasing drag from rising interest rates.
According to the IMF, Australia is expected to grow at a steady pace of a 3.7% in the
year of 2023, revised down from 4.2% previously, and then to 2.9% in 2024 as the rates
increase (IMF, 2023). The unemployment rate should stay low around the 4% even if the
growth slows down a little, owing to the labour shortages and the participation rate increasing
gradually to pre-pandemic levels (NAB, 2024). Core CPI inflation may have reached a
maximum of 4% over the period of time from the middle of 2023 but would not likely be less
than 3% at the end of 2024 due to the fact that the price pressures are not limited to energy only
but have spread worldwide (Deloitte Access Economics, 2023).
Extra cash rate hikes, following a quadrupling of rates since the late-2021 from
emergency lows, are expected to lift headline inflation back towards neutral, 5A% sustainably
over the year-average in coming years. The history of a sluggish housing market means
monetary tightening may take off far more than usual on domestic demand channels through
wealth effects (RBA, 2022). The scenario of worsening global circumstances very probably
exacerbates the risks significantly, particularly in conjunction with unemployment increasing.
Based on the level of fiscal firepower that has been unleashed during COVID-19, I
would say to government: be ready to bring in temporary changes but only as it is needed if a
global downturn bites very hard at jobs and consumer spending. Cash transfers could minimize
the damage of an external shock and prevent pushing domestic financial fragilities too far over
edge with excessive household deleveraging. Keeping Australia's productive powder dry
during inevitable periods of weakness would ensure the nation ends up with its existing
advantages when Asia inevitably starts moving again.
9
Conclusion
The stronger inflationary pressures following Australia's rapid recovery from the pandemic
have proven to be enough for the RBA, which is now set to raise interest rates. Examinations
demonstrate that historically regular bond is a decent fit to economic theory, boosting certainty
policy may very well docilely bring inflation down further. And so while expansion will
probably cool, rock-bottom joblessness and a solid fiscal position offer some protection from
the risks swirling around the global economy. That said, with global inflation firmly entrenched
elsewhere, we cannot discount a mere moderation of price growth at the domestic level.
Responsible policy can still deliver domestic support if we see a downside global scenario.
10
References
Australian Bureau of Statistics [ABS]. 2023. Wage Price Index,
Australia. [Link]
index-australia/latest-release, accessed 15 August 2024.
Australian Bureau of Statistics [ABS]. 2024a. Australian National Accounts: National
Income, Expenditure and Product, September Quarter
2023. [Link]
accounts-national-income-expenditure-and-product/sep-quarter-2023, accessed 15 August
2024.
Australian Bureau of Statistics [ABS]. 2024b. Consumer Price Index, June Quarter
2024. [Link]
price-index-australia/latest-release#data-download, accessed 15 August 2024.
Citi. 2012. Uneven but positive recovery continues, further monetary policy easing
likely. [Link] accessed 4 September
2024.
Commonwealth Bank. 2020. Australian Economic Outlook September
2020. [Link]
onomic-insights/2020/[Link], accessed 4
September 2024.
Datt, G., Lovell, K., and Pradelli, M. 2021. Trade Openness and Australian Economic
Growth. [Link]
[Link], accessed 4 September 2024.
Deloitte Access Economics. 2023. Australian Economic Outlook December Quarter
2023. [Link]
accessed 4 September 2024.
Grattan Institute. 2013. Game-Changers: Economic Reform Priorities for
Australia. [Link]
accessed 4 September 2024.
IMF. 2017. Australia 2017 Article IV
Consultation. [Link]
11
Article-IV-Consultation-Press-Release-Staff-Report-and-Statement-by-the-45099, accessed 4
September 2024.
IMF. 2021. Australia Country Economy Report June
2021. [Link]
2021-50516, accessed 4 September 2024.
IMF. 2023. World Economic Outlook Update July
2023. [Link]
outlook-update-july-2023, accessed 4 September 2024.
Mankiw, N. 2013. Macroeconomics. Cengage Learning, Stamford, US.
National Australia Bank [NAB]. 2024. Monthly Economic Insight July
2024. [Link]
[Link], accessed 4 September 2024.
Productivity Commission. 2012. Rising Protectionism: Challenges and Opportunities for
Australia in a Changing Global
Economy. [Link]
economy/[Link], accessed 4 September 2024.
Productivity Commission. 2013. Relative Costs of Doing Business in Australia:
Manufacturing Report. [Link]
australia/report/[Link], accessed 4 September 2024.
Productivity Commission. 2018. Rising Inequality? A Stocktake of the
Evidence. [Link]
accessed 4 September 2024.
Reserve Bank of Australia [RBA]. 2011. Statement on Monetary Policy, August
2011. [Link] accessed 4
September 2024.
Reserve Bank of Australia [RBA]. 2012. Statement on Monetary Policy, February
2012. [Link] accessed 4
September 2024.
12
Reserve Bank of Australia [RBA]. 2013. Statement on Monetary Policy, November
2013. [Link] accessed 4
September 2024.
Reserve Bank of Australia [RBA]. 2014. Statement on Monetary Policy, February
2014. [Link] accessed 4
September 2024.
Reserve Bank of Australia [RBA]. 2020. Statement on Monetary Policy, May
2020. [Link]
[Link], accessed 4 September 2024.
Reserve Bank of Australia [RBA]. 2022. Financial Stability Review, October
2022. [Link]
[Link], accessed 4 September 2024.
Reserve Bank of Australia [RBA]. 2024a. Statement on Monetary Policy, August
2024. [Link]
[Link], accessed 4 September 2024.
Reserve Bank of Australia [RBA]. 2024b. Statement on Monetary Policy Box B:
Developments in Labour Costs and Inflation, August
2024. [Link] accessed 4 September
2024.
13