Essay: Macroeconomic Performance Of Australia And New Zealand, 1995-2015.

Students will complete a research-based analysis and evaluation of the relative macroeconomic performance of Australia and New Zealand from 1995 to 2015.

(1) Obtain Australian and New Zealand data on the following key macroeconomic indicators: real GDP, interest rates (Australia’s cash rate and New Zealand’s official cash rate (OCR)), unemployment rate, inflation rate.

(2) Discuss the relation between both countries’ real GDP growth rates and inflation rates. Illustrate your discussion with summary statistics and pairwise graphs.

(3) Discuss the relation between unemployment rates in both countries. Illustrate your discussion with summary statistics and pairwise graphs.

(4) Discuss the relation between the cash rate and official cash rate (OCR). Do movements Australia’s cash rate drive movements in the New Zealand’s OCR? In which country has monetary policy been tighter in the past decade, Australia or New Zealand? Illustrate your discussion with summary statistics and pairwise graphs of the cash rate and the OCR.

(5) Based on your summary statistics, graphs and analysis and discussion above, write a short prediction of the macroeconomic outlook of Australia and New Zealand. Are Australia and New Zealand likely to experience a recession or expansion soon?

You must follow an appropriate format explained below. Not following appropriate format will cause a loss of some marks.

• All analytical contents must be clearly typed and printed. Hand-written report will NOT be accepted.
• Appropriate heading or sub-title of each section must be typed and used.
• You must analyse, explain and show how and why you draw your conclusion.
• You must also draw and include appropriate and relevant graphs and tables together in your explanation. Draw them using Microsoft Power Point/Word/Excel, NOT hand Only ONE COPY of the research work from each group is required to be submitted.
• It is not difficult to identify the contents that are copied from other group(s).
• Make sure your team member does not show your work to another group(s). Both who show the work and who copy the work will lose their marks heavily and fail in the assessment.

Integration between growth in the real GDP and inflation

The Australia’s economy is well-recognized in the global economy for enjoying an undisturbed economic growth for a significant long period of time. Australia was the only economy that remained relatively less affected from the huge external shocks as derived from the global financial crisis occurred in the year 2008. Manufacturing and services are the two main strengths of the economy. Agriculture also made significant contribution to the economic growth through earnings from exported primary products. It is the economy that experienced that experienced long period of economic growth generated from mining and minerals industries (Curtis, et al., 2014). The usual growth trend however marked a break in recent years due to a recorded slow growth in the recent years. Growth transition in China hurt the mining industry of Australia. Besides turmoil condition in the housing market and other external force caused the economy to account a below average rate of economic growth.

A comparable economy to that of Australia is the economy of New Zealand. New Zealand is known as a free market economy that experienced a steady growth rate following the free market principle. The most important sector of New Zealand is the Agricultural sector. The favorable condition of environment and fertile soil support the agricultural sector (Austin, Gurran and Whitehead, 2014) Economic growth is also dependent on the manufacturing and service sectors.

The report is prepared to investigate economic performance constitute by Australian and New Zealand economy. To do this important economic indicator such as GDP growth, inflation, unemployment and monetary policy framework are evaluated overtime.

Gross Domestic Product is the most commonly used indicator for evaluation aggregate output of a nation. GDP of a country actually depicts market value of the produced services and goods of a nation in a certain accounting year. There is two possible ways of estimating market value of the produced units. One is to take market price of the current accounting year GDP estimated using this method is called nominal GDP (Saymeh and Orabi, 2013). Another way is to use a price adjusted measure to compute GDP. In the price adjusted measure produced units are evaluated in terms of a fixed base year prices. This form of GDP is termed as real GDP. Growth rate in the real GDP is the movement of GDP from one year to another computed as a percentage of the former. Inflation in a used index for price level trend. This compares living cost associated with a certain living standard for two different periods. In the phase of economic expansion, there is an increase in average income. This increases aggregate demand causing demand push inflation. There is other side as well. When inflation is caused following higher cost of production, then this interrupts production and lowers aggregate output and economic growth (Kremer, Bick and Nautz, 2013).

Table 1 presents the summary and descriptive statistics for trend growth and inflation of Australia

Table 1: Summary measures of growth in real GDP and inflation in Australia

 For the purpose of analysis data of last 21 years on real GDP growth and inflation had been collected. The average GDP in the last 21 years is accounted as 3.31%. This means the economy in the past two decades grew at an annual average growth rate of 3.31 percent.  The median growth rate is 3.66. The median growth rate indicates that exactly half of the chosen period the economy grew at a rate of 3.66 percent. Coming to measure of variability, there is not much evidence of variability in the economic growth of Australia. The resulted standard deviation from the descriptive statistics is obtained 0.89. The low standard deviation indicates a stable growth path for the economy. As observed from the descriptive statistics Australian economic growth in the last twenty-one years varied from 1.92 percent to 5.02 percent (The World Bank, 2018). Average inflation or price level growth of the economy is found to be 2.66. The measured standard deviation from the descriptive statistics of inflation is obtained as 1.18. Small standard deviation reflects relative stability in inflation. Price level in Australia ranged from a maximum of 4.64 percent to a minimum of 0.25 percent.

Table 1: Summary measures of growth in real GDP and inflation in Australia

Figure 1 as presented below further explains the relationship between inflation and economic growth with pairwise time series graph.

Figure 1: Pairwise graph of inflation and real GDP (1995 -2015)

In 1995, the accounted growth rate in Australia was 3.83 percent. Inflation rate associated with the economic growth rate during this time was quite high of 4.64 percent. Economic growth followed an increasing trend till 1999. In this year, economic growth reached to the peak rate of 5.02 percent. By contrast to economic growth trend, inflation rate followed a declining trend constituting an adverse relation between the two variables (Hatfield-Dodds, et al., 2014). Economic growth slowed again in starting of twenty first century. Growth reached to 1.93 percent. As against this, inflation in the year 2000 rose to 4.38 percent. In the middle of first decade of twenty first century economic growth again increased and averaged nearly 3 percent. Both inflation and economic growth were substantially lower during 2009 followed by global financial crisis took place in 2008. With economic recovery, GDP growth and inflation reached to a stable state (Rahman, M.M. and Mamun, 2016) Now, with strong intervention of Reserve Bank of Australia, Australia is able to maintain a steady growth with a stable price level.

Table 2presents the summary and descriptive statistics for trend growth and inflation of Australia

Table 2: Summary of growth in real GDP and inflation in New Zealand

The average GDP in the last 21 years is accounted as 2.97%. This means the economy in the past two decades grew at an annual average growth rate 2.97 percent.  The median growth rate is 3.271. The median growth rate indicates that exactly half of the chosen period the economy grew at a rate of 3.66 percent. Coming to measure of variability, there is not much evidence of variability in the economic growth of New Zealand. The resulted standard deviation from the descriptive statistics is obtained 1.57. The low standard deviation indicates a stable growth path for the economy. As observed from the descriptive statistics New Zealand economic growth in the last twenty-one years varied from -1.55 percent to 6.74 perent (The World Bank, 2018). Average inflation or price level growth of the economy is found to be 2.16. The measured standard deviation from the descriptive statistics of inflation is obtained as 1.18. Small standard deviation reflects relative stability in inflation. Price level in New Zealand ranged from a maximum of 4.43 percent to a minimum of 0.28 percent.

Figure 2 as presented below further explains the relationship between inflation and economic growth with pairwise time series graph.

Figure 2: Pairwise graph of inflation and real GDP (1995 -2015)

Above graph shows pairwise movement of economic growth and price level in New Zealand. Recorded economic growth of New Zealand for the year 1995 was the 4.48 percent. Inflation as recorded on this year was 3.76 percent. For the next three consecutive years, economic growth followed a declining trend. Economic growth of New Zealand reached to the peak level in the year 1999. The associated economic growth rate was 5.19 (Gillitzer and Simon, 2015). In this year however inflation reached to the lowest level of 0.28 percent. Like Australia, in New Zealand as well inflation followed the opposite direction of real GDP growth. The resulted global financial crisis lowered both GDP and inflation growth in the year 2009. With economic resilience and supportive government policies New Zealand economy recovered the shock, Currently, both economic growth and inflation is at a stable state (Gemmell, Kneller and Sanz, 2013).

Figure 1: Pairwise graph of inflation and real GDP (1995-2015)

Table 3: Summary measure of unemployment in Australia and New Zealand

In Australia, unemployment averaged 6.09 percent in the past twenty years. The same for New Zealand is marginally higher at 5.53 percent. For both Australia and New Zealand, the unemployment series constituted a stable trend as pointed by the low standard deviation (Kelsey, 2015) Unemployment in Australia ranged between 8.51 and 4.23 while in New Zealand the unemployment ranged from 3.60 percent to 7.72 percent.

Figure 3: Movement of unemployment in Australia and New Zealand (1995 -2015)

As shown in figure 3, unemployment New Zealand in most of the times is lower compared to recorded unemployment in Australia. Since 1995 to 1997, Australia’s unemployment was above that of the New Zealand. Unemployment of the two nation almost coincide with each other for the three years from 1998 to 2000. This was the period when Australia’s unemployment started to decline while that in New Zealand increased (James, 2015) From 2001 onwards, New Zealand documented significant progress in lowering unemployment and trend unemployment in New Zealand went below to that in Australia. Unemployment again coincided in between 2008 and 2009.  This was due to global financial crisis that hurt the economy of both the nation. With continuous economic progress, unemployment in New Zealand remained below that of the Australia (Morris, A. and Wilson, 2014)

In Australia, the Reserve Bank of Australia (RBA) is the central monetary authority, which uses overnight bank rate, known as cash rate, for managing inflation within the economy (Lin and Cheng, 2016). The chief motive of RBA is to keep the inflation rate between on an average of 2 percent and 3 percent. Cash flow plays vital role to achieve this inflation target through adjusting accordingly (Tellez, 2015). On the other side, the Reserve Bank of New Zealand plays is the monetary authority of the county. This central bank uses official cash rate as an instrument and it is also an overnight bank rate of this country. The government adjusts their monetary policy on the basis of inflation rate (Berument and Froyen, 2015). For New Zealand, the targeted inflation rate is 1 percent to 3 percent. During the period of global financial crisis, these two nations merged their decision about monetary policy (Bénétrix, Lane and Shambaugh, 2015). The central banks of these two developed countries rarely follow the decision regarding monetary policy of each other for maintain the internal economic condition in a balanced level.

The following table has represented the outcome of summary statistics related to cash rate as well as official cash rate within the period 1995 and 2015.

Table 4: Summary statistics of cash rate and official cash rate

The summary statistics related with cash rate as well as official cash rate represents that Australia’s average cash rate is 4.85 percent for the given time. Moreover, official cash rate is almost similar to overnight rate of this country along with estimated average value 4.84. To represent variability within data, standard deviation has been conducted and consequently two estimated values for these two countries have been obtained. The standard deviation value of Australia and New Zealand are 1.42 and 4.84, respectively. In Australia, cash rate varied from 2.1 percent to 7.50 percent while the official cash rate various between 2.50 percent and 7.94 percent.

Relation between unemployment rates in both countries

The following pair-wise diagram has represented the trend of monetary policy of Australia along with New Zealand.

Figure 4: Cash flow and Official cash flow trend

During the starting of 1990s, central banks of both Australia and New Zealand adopted an easy monetary policy for reducing the overnight bank rate (Wu and Xia, 2016). The movement of coordinated monetary policy related to these two countries’ apex banks did not hold since 2001. Moreover, the Australian government has tightened the monetary policy in the year 2002 and during this time, the central bank of New Zealand also followed the same of Australia. Instead of this, the New Zealand central bank has taken 50 days more compare to that of the Australia for decision making. Moreover, the official cash rate of New Zealand increased by 5 percent in this situation. The Australian bank rate during this time was 4.50 percent. Again, the central banks considered the coordinated monetary policy in 2006. The Reserve Bank of Australia decreased its cash rate for stimulating economic growth of this country. On the contrary, the Central Bank of New Zealand enhanced its interest rate from 3.2 percent to 2.5 percent between 2013 and 2014.

Through reducing the overnight bank rate, a tough monetary policy was adopted. An increase in bank rate led the cost of borrowing to increase further. Consequently, investment within the economy decreased and this in turn caused economic contraction within the business cycle. As, the official cash rate of New Zealand is comparatively high than that of Australia’s bank rate, it can be stated that the monetary policy in New Zealand is tough compare to that in Australia.

During last few years, Australian economy has experienced comparatively slower rate of growth though the future economic condition of this country can be positive. By the next few years, Australian economy can experience a hit around 3 percent. In this context, it can be stated that the positive view of the specified economy has occurred due to strong investment instead of housing and mining (Dar and Amirkhalkhali, 2017). Moreover, for maintaining a strong economic growth, a comparatively stable economic condition needs to be maintained by a lower unemployment rate as well as inflation rate. The economic outlook of New Zealand economy is also coming as positive (Lu, El Hanandeh and Gilbert, 2017). Due to huge amount of immigration, labour market has become strong. Moreover, growth in service sector like tourism and affective monetary policy has strengthened the economic growth of this country (Reitz, 2018). Moreover, inflation rate as well as unemployment in New Zealand has also remained at a stable condition.

Conclusion:

In this section, the entire discussion can be concluded. Australia and New Zealand are considered as two advanced economies across the world. Hence, the entire report has briefly analysed economic performance of these two countries. It is seen that, the real GDP growth and the inflation rate of both countries has a negative relationship with each other while some other macroeconomic analyses have been conducted to know the situation.

Figure 2: Unemployment rates in Australia and New Zealand (1995-2015)

References list 

Austin, P.M., Gurran, N. and Whitehead, C.M., 2014. Planning and affordable housing in Australia, New Zealand and England: common culture; different mechanisms. Journal of Housing and the Built Environment, 29(3), pp.455-472.

Bénétrix, A.S., Lane, P.R. and Shambaugh, J.C., 2015. International currency exposures, valuation effects and the global financial crisis. Journal of International Economics, 96, pp.S98-S109.

Berument, H. and Froyen, R.T., 2015. Monetary policy and interest rates under inflation targeting in Australia and New Zealand. New Zealand Economic Papers, 49(2), pp.171-188.

Curtis, A., Ross, H., Marshall, G.R., Baldwin, C., Cavaye, J., Freeman, C., Carr, A. and Syme, G.J., 2014. The great experiment with devolved NRM governance: lessons from community engagement in Australia and New Zealand since the 1980s. Australasian Journal of Environmental Management, 21(2), pp.175-199.

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Gemmell, N., Kneller, R. and Sanz, I., 2013. Fiscal decentralization and economic growth: spending versus revenue decentralization. Economic Inquiry, 51(4), pp.1915-1931.

Gillitzer, C. and Simon, J., 2015. Inflation Targeting: A Victim of Its Own Success?. International Journal of Central Banking, 11(4), pp.259-287.

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