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RESEARCH REPORT: EVALUATION OF MACROECONOMIC PERFORMANCE OF AUSTRALIA UNDER

RAPIDLY CHANGING WORLD ECONOMIC ENVIRONMENTS
Word count (Excluding Titles, Graphs and Reference): 1,986

1. Identify And Discuss The Impact Of The Business Cycle

Figure 1 - Australia’s Real GDP Growth Rate From 2001-2023 (%)

10
5.56
5 4.15 4.12 4.37 3.8 3.79
2.64 3 3 2.63 2.57 1.97 2.44 2.77 2.23 2.59 2.35 2.72 2.42 2.85 1.82
0
01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 020 021 022 023
20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 2-2.132 2 2
-5

-10

-15

-20

-25 -23.62

-30

Source: Australia Bureau of Statistics (2023)

It can be seen from Figure 1 that the Real GDP Growth Rate in Australia followed a fluctuating trend
from 2001 to 2023. It peaked at 5,56% in the year of 2021 while it reached its lowest point at -2,13% in
2020. The figure for 2023 was calculated until September 2023 and there is no official figure for the
whole year yet. The average figure for the period from 2001 to 2022 was about 2,80%.

Figure 2 - Australia’s Inflation Rates From 2001-2023 (%)

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8 7.8

6
5.4
5

4 3.7 3.5
3.1 2.9 3.3
2.8 2.9 2.8 3
3 2.7
2.4 2.5 2.2
2.1
2 1.7 1.7 1.5 1.9 1.8 1.8
0.9
1

0
01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 22 23
20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20

Source: Australia Bureau of Statistics (2023)

It can be seen from Figure 2 that the Inflation Rate in Australia followed a downward trend from 3,1% in
2001 to 0,9% in 2020. The period from 2014 to 2020 had the lowest average inflation rate at 1,61%.
However, it started to rocket in 2021 and reached the highest point at 7,8% in 2022. It dramatically
decreased to 5,4% in 2023 which was quite bigger than the rest of the period.

Figure 3 - Australia’s Unemployment Rates From 2001-2023 (%)

6.9
7 6.6
6.2 6.1
5.9
6 5.7 5.7 5.8 5.6
5.5 5.4
5.1 5.1 5.2
4.9 5 5.1
5 4.6 4.6
4.3 4.2
3.9
4
3.5

0
01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 22 23
20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20

Source: Australia Bureau of Statistics (2023)

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It can be seen from Figure 3 that the Unemployment Rate in Australia followed a downward trend. In
2000, this country saw the rate reach its peak at 6,9%. From that point, the figures gradually decreased,
followed by a slight rise from 2009 to 2019. In 2020, the Unemployment Rate rocketed to 6,6% and then
fell by 2,4%. Its lowest point was 3,5% in 2022.

Figure 4 – Australia’s Trade Performance From 2001-2003 ($ Millions, Current $)

700,000

600,000

500,000

400,000

300,000

200,000

100,000

0
01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 22 23
20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20

Exports Imports

Source: Australia Bureau of Statistics (2023)

It can be seen from Figure 4 that Australia’s Trade Performace witnesses an upward trend during
twenty-three years. Both exports and imports reached their peaks in 2022, with the numbers of about
$595.784 millions and $434.832 millions respectively. This year also had the biggest figure for balance
on goods at $160.952 millions.

2. Relationship Between The Movements Of Inflation Rate, Interest Rate, And The Exchange Rate

Figure 5 – Relationship Between Inflation Rates and Interest Rates in Australia From 2001-2023 (%)
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8 7.8

7 6.75
6.25
6 5.5
5.25 5.25 5.4
5 4.75 4.75
4.25 4.25 4.25 4.35
4 3.7 3.75 3.5
3.1 2.9 3.3 3.1
2.8 2.9 2.8 3 3
3 2.7
2.4 2.5 2.2
2.5 2.5
2.1 2
2 1.7 1.7 1.5 1.9 1.8 1.8
1.5 1.5
1 0.75 0.9
0.1 0.1
0
01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 22 23
20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20

Inflation Rates Interest Rates

Source: Australia Bureau of Statistics (2023) and Reserve Bank of Australia (2023)

From 2001 to 2023, the Australia’s Inflation Rates and Interest Rates had familiar trends. During two
periods of 2001-2007 and 2021-2023, the figures for both rates saw an upward trends while there was a
downward trend from 2008 to 2020.

Interest rates are frequently employed as an inflation hedge. By influencing the public's purchasing
power, they achieve this. Interest rates are often increased when inflation is high and decreased when it
declines. The Reserve Bank of Australia (RBA) controls the process of changing interest rates. Consumer
spending and loan-taking tend to increase when the Reserve Bank of Australia (RBA) reduces interest
rates. This puts pressure on supply by raising demand for products and services. Companies may decide
to boost pricing to capitalize on the "in-demand" market or increase staffing levels to keep up with
demand. The CPI, a measure of inflation, rises in response to price increases.

Figure 6 – Australia’s Exchange Rates from 2001-2023 ($US/$A)

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2.50

2.001.93
1.84
1.73 1.77
1.63
1.53 1.51
1.50 1.44 1.45 1.44
1.36 1.31 1.33 1.33 1.34 1.30 1.34 1.33

1.09 1.11
1.03
0.970.97
1.00

0.50

0.00
01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 22 23
20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20

Source: Reserve Bank of Australia (2023)

From 2001 to 2023, the Australia’s exchange rates ($US/$A) tended to increase. Its lowest was 1,93 in
2001 while it reached its peak at 0,97 during 2011 and 2012. There was a slight decrease by about 0,5
from 2013 to the end of the period.

The depreciation of the exchange rate contributed to the increased inflation in Australia from 2021 to
2023 because the prices of imported goods as well as services would rise. Actually, changes in exchange
rates usually had a lag before they had an impact on inflation and economic activity. 2014 saw a
depreciation in Australia dollar but the inflation rates did not increase untill 2021. Due to the volatility of
currency rates, businesses might be hesitant to alter their pricing unless they were certain that the shift
would not revert. Households and businesses might need some time to modify their purchasing habits
even after prices had changed.

3. Supply Side Effects On Australia’s Inflation Rate, Real GDP And Government Monetary Policies

Lowering corporate income tax rates in order to offer businesses more money for reinvestment is one
example of how supply-side economics seeks to strengthen an economy by enacting policies that will
enhance the supply of products and services and subsequently spur economic development.

Similar to findings for other advanced countries using this technique (Gonçalves and Koester 2022; Chen
and Tombe 2023), it is claimed that supply-side factors have accounted for nearly fifty percent of overall
CPI inflation during the year to the March quarter in 2023. Around 4¼ percent was the greatest amount
of inflation caused by supply-side forces, and up to March 2023, they produced 3½ percentage points. It
was also discovered that demand-side variables were significant, accounting for roughly a third of the
year's inflation, or about 2½ percent points of the inflation that finished the year. Using this method,
inflation in the headline CPI by about 1 percentage point could not be categorized.
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A supply side factor with a change in interest rates can affect the amount and productivity of
investments, the volume and distribution of savings, which may have a significant impact on the pace
and trajectory of economic growth in Australia (Hongbo Guo and Zewei Zhang (2023). During the last
years in Australia, an increase in interest rates contributed to the decrease in real GDP growth rate. The
motivation to save grew as Australian interest rates climbed because saving yielded a larger payoff.
Thus, if people's salaries remained constant, saving in the economic system was expected to rise and
thus, consumption would decline. Interest rate increases raised the price of borrowing money, which
raised the expense of investing as well. This deterred Australian companies from making investments,
which lowers economic investment.

When it comes to monetary policies, a less flexible economic system, such as Australia's, would protect
labor, product, along with financial markets from unforeseen shocks that ultimately impact the
economy, but it would not smooth the procedure of modifications to those unexpected events. Negative
supply shocks, such as increases in the price of oil, are taken in with a greater rise in inflationary
pressures, which in turn permits monetary policy to adapt extremely to such shocks.

4. Regression Analysis To Investigate Real GDP Growth And Inflation’s Influence On Interest
Rates

Coefficients Standard Error t Stat P-value

Intercept 2,156512747 0,962597354 2,240306125 0,03658539
Real GDP growth rate (%) 0,022639344 0,074922185 0,30217143 0,765641316
Inflation rates (%) 0,426071525 0,297360167 1,43284667 0,167348568
R2 = 0,093586377. Significant at the 5% level

The regression output suggests that it can be predicted what the Interest rate would be, with 94%
confidence (R square), equal to the following formula:

Interest rate = 2,156512747 + 0,022639344 x Real GDP growth rate + 0,426071525 x Inflation rates

The regression results show that there is a positive relationship between Real GDP growth rate and the
Interest Rate. To be precise, for each additional real GDP growth rate, it can be expected the Interest
rate to increase by 0,022639344. A rise in an economy's average interest rate will result from a rise in
the real GDP, or economic growth. On the other hand, an economy's average interest rate will fall
accordingly if real GDP declines (a recession) (Paul R. Krugman and Maurice Obstfeld, 2022). The need
for money will rise in response to a GDP growth since more money will be needed for the buying and
selling required to acquire the increased GDP. Put another way, the transactions need effect causes an
increase in real money demand.

In addition, it can be expected that for every additional inflation rate, the Interest rate would increase by
0,426071525. Because RBA are tasked with controlling inflation, it can affect interest rates. RBA will
raise interest rates to promote individuals to save more money and reduce their spending as inflation is
rising. Inflation and interest rates usually shift in the same direction. Theoretically, this would lower
consumer demand for goods as well as services, which would aid in containing inflation.
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5. Discuss Macroeconomic Policies

There are several measures that Australian government should take to support the economy. If all
applicable activity statements are filed, qualifying SMEs should be credited with tax-free cash flow
through the activity statement system (Guay C Lim, 2021). A government loan program for SMEs should
be created to help with economic recovery and to offer ongoing support. The government will
collaborate with lenders to guarantee that qualified enterprises may obtain funding to sustain and
expand their operations.

About the Interest Rate, the Reserve Bank Board should lower the cash rate, which will improve
consumer and company cash flow overall. The exchange rate will benefit Australia's trade-exposed
businesses as well. Secondly, the Reserve Bank Board need to prolong the overnight cash rate by aiming
for a risk-free interest rate deeper down the yield curve for a while in order to assist in reducing funding
expenses across the economy (Timothy Anderson, 2021). Bank purchase of Australian government
bonds should be used to promote the goal. Thirdly, through its regular market operations, the Reserve
Bank should significantly increase the amount of liquidity in the financial system. If the circumstances in
the market permit it, it may regularly undertake one-, three-, and six-month maturity buyback
operations. In the near future, there may be a lower scale for daily open market activities (John Quiggin,
2023).

In order to reduce unemployment in a sustainable manner, policies to guarantee that the welfare
system and its interactions with the tax system do not deter individuals from looking for work must be
integrated with solid macroeconomic policies as well as workplace relations reform. The system for
industrial relations is undergoing additional changes in order to strengthen the ones that have
previously been put in place (David Evans, 2024). Policies aimed at overcoming constraints on job
development include modifications to the existing unfair dismissal regulations and the maintenance and
expansion of age-based junior pay rates. Further award simplification, a decrease in the involvement of
outside groups in the agreement-making process, and optional union membership are among the other
strategies being explored to improve efficiency and expedite business negotiations.

When deciding on monetary policy, the Reserve Bank Board keeps a total of three objectives in mind.
The stability of the Australian dollar, the preservation of full employment in Australia, and the prosperity
and well-being of the Australian populace are the three goals. Around a long-term trend, economic
growth often oscillates. In order to boost employment and economic growth, the Reserve Bank may
choose to relax monetary policy when the economy is growing too slowly due to low demand. One such
measure would be to decrease the cash rate objective (Richard Burdekin, 2023). However, in situations
when demand is too high and the economy is growing too rapidly, the Reserve Bank might tighten
monetary policy by increasing the cash rate target, for example, in order to slow down the economy and
control inflation.

The primary instruments available to the government for affecting economic activity are taxes and
expenditure, whereas interest rates are the RBA's primary weapon. The government would implement
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an expansionary fiscal strategy, which involves increasing spending and maybe reducing taxes, if the aim
is to boost economic activity (Gulasekaran Rajaguru, 2021). Tax reductions increase people's disposable
income, while increased government expenditure boosts economic expansion by adding more capital to
the system. Theoretically, expansionary fiscal policies should be observed when the government is
attempting to stimulate the economy during periods of weak growth or recession. For instance, when
entire sectors collapsed and jobs were being lost during COVID, the government intervened to stimulate
the economy with large spending. On the other hand, an expansionary fiscal policy may increase
inflation since individuals who possess more money are more likely to spend it, and price increases
result from increased spending.

Over 2024 and 2025, the Australian economy is predicted to grow below trend due to ongoing demand
constraints from rising interest rates and the cost of living. However, recent quarters have seen the
economy turn out to be stronger than anticipated, which is helping Australian firms' demand
circumstances. The very tight labor market circumstances of the previous year are starting to loosen,
and given below-trend economic growth, labor underutilisation rates are predicted to progressively
increase during the projection period. Because of the improved prognosis for aggregate demand, it is
anticipated that the labor market circumstances would ease more gradually than originally anticipated.
A decrease in the average number of hours worked is anticipated to account for a large portion of the
labor market's adaptation to below-trend increase in economic activity; employment is anticipated to
rise over the projection period (Corrado Macchiarelli, 2021). A return to low and steady inflation is
anticipated in the upcoming years as expanding domestic activity resumes its trend, aided by a more
durable equilibrium between demand and supplies within the economy, especially in the labor and
product markets. Forecasts of declining inflation are more gradual than those made three months ago as
domestic inflationary forces are expected to dissipate more slowly than earlier believed.
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Reference List

Books

Paul R. Krugman and Maurice Obstfeld. (2022). International Economics: Theory and Policy. 12th edition.
London: Pearson, pp. 10-12.

Journal Articles

Chen Y and T Tombe. (2023), The Rise (and Fall?) of Inflation in Canada: A Detailed Analysis of its Post-
Pandemic Experience. SSRN Scholarly Paper No 4215492, pp. 30-31.

Corrado Macchiarelli. (2021). Global Economic Outlook: Slowing growth, rising inflation fears. National
Institute Economic Review. 258(1). pp. 24-26.

David Baqaee, Emmanuel Farhi and Kunal Sangani. (2023). The Supply-Side Effects Of Monetary Policy.
National Bureau Of Economic Research Working Paper 28345, pp. 20-21. Available at:
http://www.nber.org/papers/w28345 [Accessed 13 Jan. 2024].

David Evans. (2024). Accelerated demand for interpersonal skills in the Australian post-pandemic labour
market. Nature Human Behaviour. pp. 23-24.

Gonçalves E and G Koester. (2022). The Role of Demand and Supply in Underlying Inflation –
Decomposing HICPX Inflation into Components. ECB Economic Bulletin, pp. 20-22.

Guay C Lim. (2021). The Australian Economy in 2020–21: The COVID‐19 Pandemic and Prospects for
Economic Recovery. Australian Economic Review. 54(1). pp. 50-51.

Gulasekaran Rajaguru. (2021). Analysis of Australia’s Fiscal Vulnerability to Crisis. Journal of Risk and
Financial Management. 14(7). Pp 297.

Hongbo Guo and Zewei Zhang. (2022). An Empirical Study of Factors Influencing Australia's GDP. MSEA
2022, ACSR 101, pp. 581 – 586. Available at: https://doi.org/10.2991/978-94-6463-042-8_83 [Accessed
13 Jan. 2024].

John Quiggin. (2023). The RBA (Reserve Bank of Australia) Review 2023: A missed opportunity. The
Economic and Labour Relations Review. 34(3). pp. 1-7.

Richard Burdekin. (2023). Daily Monetary Policy Reactions to the Pandemic: The Australian Case.
Economic Analysis and Policy. 78(1). Pp 24-32.

Timothy Anderson. (2021). Modelling the Reserve Bank of Australia's Policy Decisions and the Case for a
Negative Cash Rate. Australian Economic Review. 54(2). pp 64-65.

Websites

Australia Bureau of Statistics. (2023). Australian National Accounts: National Income, Expenditure and
Product. [online] Available at: https://www.abs.gov.au/statistics/economy/national-accounts/australian-
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national-accounts-national-income-expenditure-and-product/sep-2023#data-downloads [Accessed 14
Jan. 2024].

Australia Bureau of Statistics. (2023). Consumer Price Index, Australia. [online] Available at:
https://www.abs.gov.au/statistics/economy/price-indexes-and-inflation/consumer-price-index-
australia/latest-release#data-downloads [Accessed 15 Jan. 2024].

Australia Bureau of Statistics. (2023). International Trade in Goods. [online] Available at:
https://www.abs.gov.au/statistics/economy/international-trade/international-trade-goods/nov-
2023#data-downloads [Accessed 14 Jan. 2024].

Australia Bureau of Statistics. (2023). Labour Force, Australia. [online] Available at:
https://www.abs.gov.au/statistics/labour/employment-and-unemployment/labour-force-australia/
latest-release#data-downloads [Accessed 14 Jan. 2024].

Reserve Bank of Australia. (2023). Cash Rate Target. [online] Available at:
https://www.rba.gov.au/statistics/cash-rate/#cash-rate-chart [Accessed 13 Jan. 2024].

Reserve Bank of Australia. (2023). Historical Data. [online] Available at:

https://www.rba.gov.au/statistics/historical-data.html#exchange-rates [Accessed 15 Jan. 2024].