US President Donald frump's trade pokey has the potential to hurt the ghabol economy_ The Reserve Bank of Australia Governor has indicated that, despite the uncertainty about Trump's "financial conditions remain expansionary, although they ore gradually becoming less so in some countries."
Your manager has asked you to provide a business report on the current state of the Australian macro-economy, plus forecasts on the state of the macro-economy in six months from now lie. six months from the submission date of the assignment). Based on these forecasts, what changes (if any) do you expect the Reserve Bank to make to the cash rate over the next six months? Briefly outline the basis of your cash rate forecasts.
To argue your case, use a macroeconomic model that you have learnt from this course as a vehicle for analysing key variables that drive our economy and influence key macroec000mks indicators.
Current macroeconomic conditions of Australia
The president of the U.S.A has announced various trade policies among which one of the policies is imposition of 25% and 10% tariff on imports of steel and aluminium, respectively (Handley and Limão 2017). This trade policy, in turn, has adversely affected many trading partners of the U.S.A and Australia is one of them. The impact on Australia will be less compare to other trading countries, as it trades little amount of aluminium and steel to the U.S.A. However, this trade policy can bring trade war with other trading countries and indirectly can adversely influence Australia through reducing its exports to other countries, especially in China (Lawrence 2018). Trading with China has contributed a large share to the national income of Australia and consequently this has helped the country to grow its economic condition. In addition to this, this trade policy and tariffs can bring long-term conflict between Australia and the U.S.A based on economical, political and military ties.
However, the Reserve Bank of Australia has predicted that the uncertain outcome of trade policies of the U.S.A cannot influence the financial conditions of Australia negatively. Hence, this report has intended to prepare a business report, based on present macroeconomic condition of Australia (Ellis 2018). In addition to this, the report will forecast on the country’s economic condition for next six months.
Business confidence level:
According to present statistical data, it can be said that economic activity of Australia is growing significantly during the second quarter of 2018. In July 2018, the business confidence level has increased slightly (7) compare to last month (6), which implies that business sectors become optimist to conduct their business activities further within the economy (Stanley, Doucouliagos and Steel 2018). This indicates that various factors, which are consumer confidence, interest rates, employment and inflation, perform well.
During this second quarter, unemployment rate reaches to the lowest level since the last six years.
According to above figure, it can be said that unemployment rate has reduced over the year and in July 2018, this rate has decreased to 5.3% from 5.4% of the previous year (Evans 2018). The rate in July is considered as the lowest rate of jobless people since November 2012, as the country only loss 3900 jobs and consequently the number of unemployed people decreases by 5700. Since 1978, the average unemployment rate of Australia remains at 6.87% (Tradingeconomics.com. 2018).
Moreover, confidence level of consumer increases significantly since last year, after the government cut income tax from 1st July 2018. During this quarter, the economy also experiences robust growth in non-mining sales while consumer spending also increases sharply. This in turn generates job opportunities through developing retail sales. Nominal growth of retail sales in June reaches to 0.4% (Tradingeconomics.com. 2018). Continuous growth in retail industries leads the consumer expenditure to increase further. Sales increase in various sectors, such as, household products and foods in cafes, restaurants. In addition to this, sales in footwear, clothing and personal accessories also increase. However, the real estate market has performed poorly due to decreasing housing prices in the east coast area.
On the other side, inflation rate of this country increases to 2.1% in the second quarter of 2018 from the last year (1.9%) while the market expectation for last year was 2.2%. Inflation in Australian market occurs due to increasing prices of electricity, fuel and tobacco.
Figure 3 represents inflation rate of Australia for the last five years. According to this figure, it can be said that inflation rate of Australia has fluctuated over the years significantly. Since 1951 to 2018, average inflation rate of Australia has remained 5.02%.
Interest rate is other macroeconomic concept that can explain economic growth of this country. The Reserve Bank of Australia has kept its interest rate at 1.5% since 2016 (Wong and Reddy 2018). The average interest rate of Australia has remained stable at 4.53% between 1990 and 2018 (Hameed and Rose 2018). This changing trend of interest rate has represented in the following diagram.
Other macroeconomic factors that can represent growth of this country are trade balance. Through considering both exports and imports, trade balance of a country can be calculated and this is also true for Australian economy. Exports in this country have increased monthly at a 3% rate and consequently have reached to a record level of AUD 36.44billion during the first month of second quarter (Casavecchia, Loudon and Wu 2018). Exports of non-rural goods have increased 2% that is AUD 22.92billion chiefly due to 1% minerals and metal ores and other non-rural products (15%) along with other manufacturing goods (6%). Moreover, exports of rural products have also increased by 5% to AUD 4.16 billion containing cereal preparations and cereal grains by 10% and other rural products by 6% and meat preparations by 2%. In addition this, exports of non-monetary gold earn AUD 1.98billion. Service exports also increase by 1%. Thus, average exports of Australia remain AUD 10855.50million between 1971 and 2018 and reach to the highest in June 2018 worth AUD 36439 million (Tradingeconomics.com. 2018). However, the overall export of Australia has increased over the last five years while in 2017 this rate has increased significantly.
On the contrary, imports of Australia reduce by 1% month-to-month and become AUD 34.57billion in the 6t month of 2018. However, during this period, purchase of merchandise and other intermediate goods decrease by 4% that is AUD 10.74billion considering fuels and lubricants, transport equipment and other processed suppliers of industrial products. In addition to this, imports of non-monetary gold and services decline to AUD 638million and AUD 7.62billion, respectively in June 2018 (Smith and Trakansirinont 2018). On the contrary, Imports of capital goods along with industrial transport equipment increase significantly. During 1971 and 2018, average imports of Australia have remained AUD 11390.72million and this amount reaches at its high level to AUD 34800million in recent year (Tradingeconomics.com. 2018). Figure 6 represents the trend of Australia’s import for the last five years representing that the imports of this country has increased over the year though between 2015 and 2016 this trend has decreased slightly.
After discussing exports and imports of Australia, trade balance of this country can be discussed further. The country experiences trade surplus that increases drastically by 158% that is 1.87billion in June 2018 compare to last month. As exports surpass imports, Australia experiences trade surplus and consequently the country experiences higher trade surplus in May 2017. The average trade balance of Australia has remained AUD -535.43million between 1971 and 2018. In December 2016, this trade balance of Australia has reached to its higher level worth AUD 4534million while in April 2015 this trade balance has reached at a lower level of AUD -4210million (Tradingeconomics.com. 2018).
After discussing these macroeconomic factors, GDP growth rate of Australia can be discussed. GDP growth of this country depends completely on the performance of these macroeconomic variables (Bahmani-Oskooee and Baek 2018). During March 2018, Australia experiences the highest growth in its GDP since the second quarter of 2017 and this expansion happens mainly due to robust growth in its exports. In the first quarter of 2018, the Australian economy expands by 3.1% while in the first quarter this economy expands by 2.4%. Hence, Australia experiences the highest growth in its economy since second quarter of 2016. The average GDP growth of this country between 1959 and 2018 has remained at 0.86% (Tradingeconomics.com. 2018).
Figure has represented the GDP growth of Australia since 2013. According to this figure, it can be said that the growth has fluctuated over the year drastically. After 2016, the country has experienced negative grow indicating adverse situation in economy. However, after this, Australia has recovered its economic condition again and after that, it has not experienced any negative GDP growth rate until 2018 (Stevenson and Robinson 2018). Moreover, the figure has also stated that GDP growth of this country has increased significantly after second quarter of 2017 and in the first quarter of 2018, it has reached to the highest position.
It is predicted that GDP growth of Australia can increase further since September 2018 to next six months, as the monetary policy of the Australian government will help the income and consumption to household along with business in non-mining industry to increase further. On the contrary, investment in mining sectors will end. In addition to this, investment in public infrastructure and the National Disability Insurance Scheme (NDIS) may lad public demand to increase further. It is also expected that exports of iron ore may increase further over the next six months, as major producers of Australia increase their production significantly. In addition to this, inflation of this country is expected to increase further (Tradingeconomics.com., 2018). This gradual increase of inflation represents the capacity of Australia’s economy to decline slightly, as the country is moving towards full employment. Hence, the labour cost further can influence the inflation of Australia to increase. As a result, the RBA has predicted the inflation rate around 2 ¼ % during next six months starting from September 2018 (Reserve Bank of Australia. 2018). Unemployment rate is expected to decrease in coming months while inflation rate and balance of trade are expected to increase significantly over these upcoming months. For this healthy economic condition of Australia for the next six months, the RBA can maintain its interest rate at 1.5% (Reynolds et al. 2018).
It is predicted that the Reserve Bank of Australia will keep its cash rate at 1.5% since August 2016. According to the Trading Economics, this cash rate can be increased further to 2% in 2020 (Tradingeconomics.com. 2018).
The Australian economy has performed well even after the president of the U.S.A has proposed a new trade policy regarding imposition of tariff on imported steel and aluminium. For this, exporting countries like China may have trouble for doing trade with the U.S.A and consequently, a trade war can begin. Australia may not experience such problems, as the country exports little amount o this metal to the U.S.A. However, the trade war with China can adversely affect Australia. In this context, the Reserve Bank of Australia has stated that the economic condition of Australia cannot be disturbed and this statement can be described with the help of macroeconomic factors, such as, GDP growth rate, interest rate, unemployment rate, business confidence level, inflation rate and trade balance of Australia. After analysing these factors it can be said that interest rate of Australia has remained at a lower and stable rate while net trade balance and business confidence level increase. Moreover, unemployment rate and inflation are predicted to increase over the next six months. From the forecast of Reserve Bank of Australia, it can be predicted that GDP growth of Australia can increase further for the next six months starting from September, 2018.
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