The Business Cycle
Discuss about the Australian Great Recession Survival.
In the year 2008, the major Europe experiences the Global Financial Crisis recession by the name the Great Recession. Most countries with large economies were affected. The recession hit the members of Organization for Economic Cooperation and Development (OECD) like USA and France. Economies in Europe shrank and currencies weakened. The preferred economic interventions failed to work in most economies instead the worse happened. Funnily enough, Australia was never affected by the recession (Bailey and Turok 2016). It remained the single country with advanced International Monetary Fund not affected by the crisis (Bosworth and Rich 2013). Instead, its economy remained stable and vigorous to accommodate its domestic and international demands. The paper aims at evaluating the magic behind the performance of Australian economy during the global crisis. It discusses the country's intervention policy through the Reserve Bank and the fiscal policy intervention by Federal government that maneuvered ways for its stability.
It is also objectively looking at the role played by China as a trading partner. China played a role in foreign trade category to ensure the success of the economy. The paper then draws a conclusion from the results of the discussion to justify the two questions:
Did the success of the economy purely dependable on fiscal policy by Federal government, foreign trade and the role of Reserve Bank?
Why the three factors did adequately sustain the economy?
The objective of the study
The study aims to draw conclusions on the roles played by Federal Government, Reserve Bank, and Foreign trade to maintain Australian economic growth at the crisis point.
In macroeconomics, the business cycle considered as fluctuations in the production or any other business. It involves expansionary, and contractionary behaviors of an economy. The best determination of a business cycle is GDP. The components of the cycle are; trough, expansion, peak, and contraction.
The definition of a recession is a conceptual reasoning pegged on the level and extent of a crisis. The different intensity levels are used portraying the different scope of impact on an economy (Courvisanos et al. 2016). However, a recession is an economic slowdown contributed to reduce spending. It hampers economic growth by introducing inflation, unemployment, and reduced Gross Domestic Product.
The recession creates financial hurdles in an economy by negatively affecting all economic sectors. During a recess, countries take intervention measures to curb the impacts. Among the responses preferred are fiscal policies to increase the spending by reducing tax rate or through monetary policies. Although, there is no guarantee on the effectiveness of measures against the crisis.
The Definition of a Recession
The government of Australia did a timely intervention to monitor the crisis that had the most terrorizing effects on G7 economies. Before the GFC the country economy was operating at annual GDP of around $1 trillion at the market exchange rate. The GDP level demonstrated the economy as the 14th largest economy in the world.
The first intervention policy done by the country focused on the crisis was advocated by the Reserve Bank of Australia (RBA) (Bosworth and Rich 2013. The bold step was taken in around October when the country through RBA announced the cutting of interest rates by 100 basis points. In the same month, the government decided to react proactively by guaranteeing all the bank deposits a wholesale fund at a fee (Doran and Fingleton 2016). The geared step aimed towards the achievement of a stable financial institution. The government intended to empower the banks through which they could sustain stability hence help secure the country's flow of income (Martin 2012).
The intervention placed the banks in a competitive mode, an action that threatened the survival of small-scale banks. The stability in financial sectors eased consumers and business worries on the finances and economic issues. The Federal took the initiative of a private sector risk to reduce the tempo of the economy.
The second policy taken by the government was the fiscal policy measure. The system directed the package to the weak sectors of the economy (Foster 2016). The areas covered were the household spending and consumption. The coverage represented a population of around 60%. Thus more people were kept safe by the program (Henry 2014).
The housing policy advocated for the grant to first home buyers. The spending level of citizens increased and the GDP rose (Bosworth and Rich 2013. The consumption package had quick bonuses to seniors, and the pensioners. It also valued the low-income earners (Pulla 2013). The high propensity level of the households improved hitting the common target. Apart from risen expenditure, the society had cash to carry out activities.
The policy attained the average GDP of average consumers in the economy. At June 2009, the country enjoyed a continuous growth with the fiscal, China trade factor and RBA combined. According to various scholars, the economic growth would not have been hit high without fiscal policy intervention. The economic status had a loose monetary policy, low exchange rate, and china's trade contribution.
In 2009 when the effect of GFC increased on the economies, the government released another discretionary policy. The government meant to develop a program on infrastructure and also improve consumption (Drew 2016). The program covered the projects on the fast constructed infrastructural base to prepare the country for a long term crisis.
The Role Played by the Federal Government to Control GFC
The retail trade by 2009 brought a turnover of around 5% something that devastated the US and other significant economies. Their retail trade brought a turnover of around 2% and 3%. The outcome variance came due to the stimulus preference by the countries. Australia preferred a stimulus package for consumption and spending that stabilizes spending and consumption in the market. The low-income household got financial supports to meet their purchasing nature (Capon and Reid 2016).
Also, the country had better financial regulations fertile for the fiscal policy effected by the government. The good status of its financial system accommodated the measures advocated for on economic activities. The country's cash rates were higher compared to other trading partners, a factor that enabled the stronger economy (Roos 2014). The existed healthier systems blocked the need to outsource for the financial instruments which could have contributed negatively.
In the absence of fiscal policy, the country would have undergone the worst recess in the history. The countries like the USA that effected monetary policy minus economic policy has been struggling with the crisis impact to date.
The GFC collapsed economies of the Australia trading partners. Germany, USA, and France got affected. The country before the GFC had good trade ties with Asia. The large Asia depended on the country's exports such as gold and coal. The USA was also a major importer of Australian exports (Battisti et al. 2013). However, recession left the country with no choice but to trade Asia.
The government of China in response to the crisis ordered its banks to borrow and spend. The reaction led to the growth of China economy by around 75% in the year 2009. China's economy grew with expansion in its import demand. Australia began to export its commodities to China and Japan. China being the major importer, increased the Australian export capacity by 10% within five months. The prices attained stability. The export to Asia became more instrumental to the economic growth of the country.
The Chinese government created a fertile grounds for Australian trading activities to flourish. The existed high demand on the china's economy on valuable commodities provided the growth gap to the Australian economy.
The country had the attentive financial system ready to accommodate and implement changes. The first phase of rectifying the suggesting crisis situations came from the policy of an RBA. The RBA through its first Board meeting GFC proposed the implementation of the cut on the interest rates by 100 basis points. The cut is a 6% reduction.
The Contribution of Foreign Trade to the Australian Resilience
The RBA followed with the different monetary policy that ensured a fall in the cash rate to 3%. The rate indicated a decline of 425 points. The reduced interest rates encouraged borrowing among the population (Reed 2016). The effect translated to increased disposable income. Low-income earners got the opportunity to maintain their spending ability consequently improving economy's expenditure on commodities.
Reduction of the interest rate created a movement in the AUD dollar. The reduced dollar helped to lessen the impact of lowered global market price on the country's exports. It improved the level of competition of the country's produce and service exports (Buckley et al. 2014). The reduced exchange rate lasted for a short period, though the exchange rate hit 88 US dollars by 2009. The increase demonstrated an appreciation trend.
The policy guidelines portrayed by RBA helped the healthy financial sector resist to collapse. Banks and other financial institutions survived the volatility of the financial situations in the global market. Regardless of the challenges, they still made profits (Tang 2015). The Australian market had no toxic assets that killed the world market in most of the Europe countries.
The RBA kept reducing the cash rate in early 2009 to cope with the deteriorating economic conditions. The measure aimed at recovering stabilizing financial systems to help improve the functions of the credit market.
The country monetary system performed a massive role by ensuring availability of funds in the banks. Australia had enough cash in its financial institutions, with mortgages for emergencies ((Bailey and Turok 2016). Therefore, the policy by the RBA had a motivating reception for implementation. The banks had low arrears and defaulted a factor that hindered exposure to toxic assets in the global financial market. Regardless of the risks associated with accepting wholesale funding, their confidence enhanced the initiative (Tonts et al. 2014).
Through evaluation of alternatives, the RBA noticed the importance of using domestic financial institutions instead of looking for borrowings from the foreign institution.
Australia survived the great recess getting out developed due to national and international factors. The major contributor to its success relies upon timely and objectively implemented fiscal policy. The stabilization of financial market came with trade advantages in the exchange market. The monetary policy by RBA bettered the sustainability of the stable economy.
The discussion on the fortune and other magic factors never contributed to the economic growth of Australia. The country cultivated from its ready policy and proactive strategies. It stole the chances created by the fast-growing economy provide supply to its large demand market. However, the main reason behind the country's success pegged on the fiscal policy that improved spending ability of low-income earners. From the study, it is appropriate for economies to have robust financial institutions that are sound and dynamic. Countries should be ready to challenge emergencies through the use of their strategies without depending on a similar problem-approach style.
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