Macroeconomic Environment of Australia: Past and Present
Macroeconomic Environment of Australia: Past and Present
The Australian economy has undergone a diverse range of changes from the nineteenth century to the contemporary times. The country is characterized by a wealth of natural resources, exploited through agricultural practices. Participation in the manufacturing industry and development thereof began actively taking shape in the 1970s with mineral exploitation being at the core. Based on the economic history of the country, the GDP and employment rates have continued to change depending on the nature of trade conditions and use of available resources. For instance, the agricultural economy of the early 1990s has given way to greater manufacturing capacity hence resulting in a blended economy (Anderson, 2017). As such, most of the GDP arises from large scale agricultural practices yet is supported by the manufacturing and service industries which have also grown significantly over the years. Based on comparative economics, the GDP of Australia that arises from agriculture continues to be above those of other high income countries. The sector is identified to be high wage and labor scarce hence the associated GDP growth.
The developments in the economy of the country can clearly be linked to economic and monetary policies that have been instituted by Australia through the years. Such policies have led to continued expansion of different sectors involving tradable as well as non- tradable goods and services respectively (Anderson, 2017). It is inevitable that the progress realized can be demonstrated through various macroeconomic indicators including the GDP growth rates, exchange rates, interest rates, unemployment and CPI and the inflation rates. Through these key indicators, the ensuing paper discusses the macroeconomic characteristics of the country. The main objective of the paper is to help in understanding how Australia has progressed economically from the 1990s to the present day. This is to be achieved through a review of past and current economic statistics for the country.
Trends in Macroeconomic Indicators from 1990 to Present
| Indicator | 1990 | 1995 | 2000 | 2005 | 2010 | 2015 |
| Real GDP growth rate (World Bank, 2016) | 3.321 | 3.879 | 1.929 | 3.207 | 2.018 | 2.24 |
| Interest Rates (Trading Economics, 2017) | 17.5% | 7.5% | 5.0% | 5.0% | 4.5% | 2.0% |
| Unemployment rates (Australia Bureau of Statistics, 2016) | 6% | 8.8% | 6.0% | 5.0% | 5.8% | 6.0% |
| CPI & Inflation rates (Lowe, 2010) | 6% | 5% | 3% | 3% | 2% | 1.5% |
| Exports and Imports as percentage of GDP (DFAT, n.d) | 25% – goods 34% – services | 29% – goods 38% services | 31%- goods 39%- services | 32% – goods 42% – services | 31% -goods 40% – services | 31% – goods 41% – services |
From the table above, various trends are observable. The summary provided purposes to portray the developments in each of the economic indicators outlined and subsequently to link them to policy and trade changes in Australia through the years. From the reports, the GDP growth rate was highest in 1995 and lowest in 2000. However, the values of the real GDP growth rate between 2005 and 2010 indicated a decline, which could have been caused by various factors including globalization and divergence from natural resources as a revenue resource. The interest rates on the other hand have been declining through years, from 17.5% in 1990 to 2.0% in 2015.
This could indicate a growing financial sector coupled with supportive monetary policies on lending. While the unemployment rate remains more or less within a limited range through the years, the CPI and inflation rates have reduced significantly from 6% in 1990 to 1.5% in 2015. This is an indication of a stable economy where the availability of the means of production does not depend on the global or local market characteristics. In the 1990s, Australia was characterized by a volatile currency, which was easily affected by market conditions hence leading to frequent fluctuations in the exchange rate. With the stabilization of the economy, the Australian Dollar has since stabilized as well as risen in terms of value relative to the U.S dollar.
Comparison of Different Indicators
The economic indicators interact to a large extent since the macroeconomic environment is created through interplay of all the factors. Particularly, the GDP growth rate is affected by and also indicates some of the factors that are outlined as macroeconomic indicators. The charts below can be used to explain the relationships between the different macroeconomic indicators in Australian economy between 1990 and 2015.
GDP growth Rate and Unemployment
Based on the two charts above, the trend in the GDP looks almost similar in appearance to that of the unemployment rates in the country. For instance, the GDP growth peaked in the period between 1990 and 1993 (Stevens, 1999). Similarly, the unemployment rates also peaked during this period. The rationale for this observation can be linked to the role of employment in the GDP. It is at this time that the service industry was picking up in Australia. Difficulties in the trade environment coupled with the increasing demand for skilled labor could have led many people to leave their jobs due to redundancy (Stevens, 1999). The early 1990s was also characterized by rise in economic activity resulting in improved performance quality.
During the other years, the reduction of GDP growth rate could also have been also associated with the reduction of productivity in the country. According to Gruen and Stevens (2000), the unemployment growth in the 1990s could have resulted due to the emphasis on the physical investments rather than the human investments. It is also during these years that the country recorded higher average population growths leading to a high percentage of dependent members of the society, especially children. Immigration rates also contributed to high unemployment levels among the locals. These factors can somewhat provide an explanation as to the probable causes of the high GDP growth rate experienced. For instance, the country invested in the means of production, leading to greater employment opportunities. The immigrants took up the opportunities hence earning revenue for the country. As such, while the real GDP increased, the GDP per capita reduced due to the cumulative high populations.
GDP growth and Inflation/ CPI
The charts below depict the link between the Consumer Price Index (CPI) and the real GDP growth rate. In the early 1990s, the inflation rate was high while the GDP was moderate. Through the years, the inflation rate has continued to decline while the GDP fluctuates over a range of values.
For a growing economy, a high GDP should be linked to low inflation while a low GDP can result in a high inflation level. The results depicted above show that Australia has advanced its policy practices towards the achievement of the national objectives with regards to economic growth. Lowe (2010) describes the inflation characteristics of the country as they have progressed from the 1990s. According to Lowe (2010), inflation can have strong negative impacts on the citizens. However, it can be checked to ensure that the citizens are always within such affordable limits. This explains the rationale behind the seemingly unaffected inflation rates despite the fluctuations in GDP. For instance, the Australian government instituted a policy where the main objective was to set the inflation forecast at a particular midpoint and target band. It is the responsibility of the Central Bank of Australia to determine if there is anything peculiar about fluctuations and act as soon as fluctuations beyond the allowed bands are observed (Lowe, 2010). The Central Bank faces a penalty any time the inflation rate goes above or below the targeted band.
While this places a restrictive measure on the Central bank, it has the potential of exerting undue pressure on the same. As such, a more flexible approach is recommended whereby the Central Bank is given limits within which to have the inflation rates as well as the flexibility to determine the rate at which to take back the inflation to its intended position when it goes beyond the allowable band (Lowe, 2010). This not only helps the Central bank to make informed decisions but also helps the country to avoid future negative impacts. The central bank must however demonstrate its commitment to provision of medium term flexibility in terms of prices such as interest rates. The flexible approach takes into account greater details and covers a wider scope compared to the conventional restrictive approach (Lowe, 2010).
Comparing the conditions under which the inflation rate has been kept in check in Australia, it is inevitable that the GDP would have no impacts on the CPI. This is not however by making unreasonable fiscal policies but through exploration of all available options for CPI regulation. One of the factors that can be said to have contributed to this is the availability of huge reserves of natural resources, which imply that the production costs in the country are minimal. For instance, McLean (2013), reports that Australia is a natural resource rich country that depends on farmlands and minerals for the GDP growth. Moreover, the services industry has also been expanding, particularly from 2000. Balancing between the goods produced for domestic and export purposes help the country to plan within the constraints provided by the available resources.
Real GDP Growth Rate and Interest Rates
Like the CPI, the interest rate in Australia has been declining through the years. The trend of the interest rates in the country should indicate a relationship between the two of them. However, in the picture below, the trend is portrayed to reduce while the GDP generally fluctuates within five year terms.
The reduction in the interest rate can be linked to several factors which affect the operations of financial institutions in the country. In a growing economy, the GDP increases when the interest rates increase. At any given time, the trend in GDP should be reflected from the trends in the interest rates since the interest are also part of their expenditure. In Australia, fiscal policies have been used extensively to confine the interest rates within the country. Through such actions and policies, it has been possible to protect the national economy as from currency crises caused by improper and poor planning for expenditures. Poor governance of finances, un-bulging foreign finances; and high financial prices are what result in the potential for increased interest rates (Stevens, 1999).
However, Australia can be said to have been applied stringent monetary policies in the control of the financial sector, an action that has not only helped to curb excessive interest rates but also to manage the exchange rates in the country. In the early 1990s, the country experienced great variations in the currency exchange rate due to the economic instability experienced. The period after 1997 however led to great changes which helped to stabilize the currency. There are many factors that have contributed to the relative strengths of the Australian Dollar in the many years in which the quality of performance of the Australian dollar improves. Structural and institutional reforms conducted through the years contributed to significant growth and stability of the currency. Appropriate policy actions taken at every stage of the implementation process help to escape different crises, such as the Asian crisis which affected most of the countries in Asia.
While the country was making efforts to reduce the impacts of external shocks on the trade sector, the Australian Dollar depreciated slightly to adjust to the shock. This helped to prevent future negative fluctuations in the currency while also resulting in huge export losses for the country. This has since been rectified through long-term fiscal policies that address the actual challenges faced by the economy (Stevens, 1999). High financial prices at particular times during the progress from 1990 to 2015 also helped significantly to control the exchange rates within the acceptable and commendable limits. It is for this reason that Australia is recognized as one of the fastest grown economies in the world. In spite of this, the country is still changing, particularly the aspects of economic productivity. From farming based revenue to increased activity in the services industry, Australia stands as one of the leaders in the Eastern region (Foster, 2014). The GDP notwithstanding, the country has put in place structures and institutions that can withstand external and internal shocks across the temporal divide.
The Real GDP Growth rate and Trade
Trade takes a central place in the Australian economy. This is because prior to manufacturing and technology, trade was in existence. The domestic economy of Australia was initially recognized as a fragmented environment, where there importance of regional markets was downplayed. Through the years, export and import has continued to take a central place as a form of trade in Australia. With increasing participation in trade and expansion of available opportunities, Australia has increased the GDP input through trade to a great extent relative to the 1990s.
From the charts above, it is observable that while the GDP sustains its growth within specific limits, two way trade as a percentage of the GDP has continued to grow. This implies that the percentage of revenue generated through trade as part of the GDP is increasing. According to Otto (1996), Australia’s economy has grown in trade due to the removal of trade restrictions which has seen greater investment not only in physical capital but also in human capital and in research and development.
Similarly, many microeconomic reforms have been initiated leading to the development of trade into more viable economic practices. For instance, factors such as labor deregulation, tariff reduction for exports and imports; protection of local traders from the foreign competition; reduction of extortionist taxation procedures; privatization of some of the corporations and public enterprises and the deregulation of the fiscal markets have all led to rise in import- export activities (Otto, 1996). As such, it is expected that as the percentage of revenue generated through trade rises, the GDP should also rise. The fluctuations observed however indicate a slower rising rate for the GDP. The trade sector has further been enhanced through the availability of plenty and cheap fossil fuels (Foster, 2014).
Apart from the aforementioned reasons for growth in two way trade activities, McLean (2004) also suggests that the sector has continued to grow due the communication advancements that have originated from technologies. Social infrastructure development has led to enhanced growth as more people communicate and get access to goods and services. The combination of social infrastructures and the 2010 resources boom automatically led to a significant boost on trade. Furthermore, Kropman (1998) links export- import expansion to liberalization of trade that occurred from 1997 to 1998.
Conclusion
The economy of Australia has undergone significant growth since the 1990s. This has been linked to various factors including the availability of an abundance of natural resources, effective fiscal and trade policies and population control among others. For instance, the reduction in inflation levels from 1990 to the present day is linked to the fiscal restrictions placed upon the central bank, which require the bank to maintain the CPI within a specific range. Similarly, trade has been expanded through effective policies such as deregulation of labor and liberalization of trade. Based on these factors, Australia can act as an excellent point of reference for countries desiring economic progress.
References
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