Comparison Of Economic Indicators Of Australia And New Zealand In An Essay.

Critically analyse and evaluate the macroeconomic performance of Australia and New Zealand.
 

Overview of Australia’s economy

Australia is a mixed market economy with accounted GDP being $1.69 trillion in the year 2017.  Australia is one of the wealthiest nations after Switzerland. Australia holds the record for having longest period of undisturbed economic growth. Australia successfully maintained an economic environment of continuous growth, low level of unemployment, stable price and low public with a stable and strong financial system for past few decades. In the Australian economy, the most vital sector is the service sector. Service sector accounts 70 percent of GDP (Parliament of Australia, 2018). This is also the highest employment generating sector in the economy. In recent years, the economy faces some difficulties because of a sudden fall in export price, sluggish China’s growth and some internal economic issues.

New Zealand is an open economy following principles of free market economy.  Agriculture is the most vital sector of the economy. The favorable condition growing different crops help in developing different sophisticated methods for farming. Besides agriculture, manufacturing and service account sizeable portion of the economy. The economy has maintained a stable growth rate. The resilient nature of the economy was evidenced from quick recovery of the economy from the recessionary impact of global financial crisis (Economic Overview, 2018). Strong economic growth of the nation is sourced from strong construction sector, boom in tourism service and relatively strong position of trade.

The report is prepared to summarize performance of Australia and New Zealand over considerable long time range. Major indicators such as GDP, inflation, unemployment and monetary policy is considered for the two nations. 

A composite index covering performance trend of overall output is the Gross Domestic Product. It is quantity measure obtained by multiplying produced quantity of output with the respective market price. There are two ways for determining value of the produced output. One is to use prices of the current year, which is known as nominal GDP. The other way is to use market price of historical base year. This is known as real GDP. The real GDP or GDP at constant prices is considered as a more accurate measure of GDP as is offset the inflationary pressure and provides true value of aggregate output. Rate at which real GDP changes each year is known as the accounted real GDP growth which is taken as a proxy measure of economic growth. Inflation rate signifies rate of change in the average level of prices of a nation. Inflation is computed from the percentage change in the consumer price index in two different periods. Real GDP growth and inflation is often considered as interrelated (Bernanke, Antonovics and Frank, 2015). An increase in real GDP growth raise average income. Thus might induces an increase in inflation as resulted from an increase in demand. Low to moderate inflation though is favorable for economic growth very high inflation might have a detrimental effect on productivity growth.

Overview of New Zealand’s economy

The table below represents real GDP growth rate and inflation rate of Australia

Table 1: Summary and descriptive statistics of inflation and GDP growth

As observed from the summary statistics, mean GDP growth rate in Australia for the period chosen under evaluation is 3.31. This means despite several upturn and downturn, the Australian economy on an average grew at an average rate of 3 percent. Stability in growth phase can be understood from the estimation of standard deviation. The summary statistics show that standard deviation of the growth series is 0.89. Smaller standard deviation means a stable growth rate. Australia recorded the highest growth rate at the end of 1990s. The growth rate of 5.02 percent is the highest growth in the evaluation period. Rate of growth was the slowest in the aftermath of global financial crisis (Rahman, Shahbaz and Farooq, 2015). The economy grew only at a rate of 1.92 percent in 2009. Average inflation rate in Australia as obtained from the summary statistics is 2.66. The obtained standard deviation for inflation is 1.18. Inflation. Inflation rate in Australia varied from 4.64 percent in 1995 to 0.25 percent in 1997.

This can be further discussed with help of the following figure explaining the trend in growth and inflation rate pairwise

Figure 1: Pairwise graph of GDP growth and inflation in Australia

Figure 1 captures the simultaneous movement in rate of GDP growth and inflation overtime in Australia. Economic growth rate in Australia in 1995 was 3.83%. The documented inflation in 1999 was 4.64 percent. The economy of Australia continue to grow at an increasing rate till 1999.  Economic growth hit the highest at 5.02 percent in that year. In contrast to growth rate, inflation rate continued to decrease for the relevant period. The economy grew at a relatively slower rate during 2000 and 2001. Economic growth declined to 1.93% (Khan and Bashar, 2015). While inflation during this time increases at an increasing rate. The economy again started to grew at a faster rate since 2002. Inflation rate was relatively slower during this time. In 2009, following the shock of global financial crisis the economy hit the lowest growth rate in 2009. The slowest economic growth was associated with a lower inflation rate of 1.82 percent. Economic growth slowly speeded up since 2010. Inflation though increased initially but in response to active monetary policy price level has stabilized along with a stale growth rate.

Analysis of GDP Growth and Inflation in Australia

The table below represents real GDP growth rate and inflation rate of New Zealand

Table 2: Summary and descriptive statistics of inflation and GDP growth

As observed from the summary statistics, mean GDP growth rate in New Zealand for the period chosen under evaluation is 2.96. This means despite several upturn and downturn, the New Zealand economy on an average grew at an average rate of around 3 percent (The World Bank, 2018). Stability in growth phase can be understood from the estimation of standard deviation. The summary statistics show that standard deviation of the growth series is 1.57. Smaller standard deviation means a stable growth rate. New Zealand recorded the highest growth rate at the beginning of 1995. The growth rate of 4.58 percent is the highest growth in the evaluation period. Rate of growth was the slowest in the aftermath of global financial crisis (Gillitzer and Simon, 2015). The economy grew only at a negative rate of -1.55 percent in 2008. Average inflation rate in New Zealand as obtained from the summary statistics is 2.15. The obtained standard deviation for inflation is 1.18. Inflation. Inflation rate in Australia varied from 4.43 percent in 2011 to 0.28 percent in 1999.

The pairwise graph in figure 2 summarized the trend of inflation and GDP growth rate in New Zealand.

Figure 2: Pairwise graph of GDP growth and inflation in New Zealand

The pairwise movement of GDP growth and inflation in New Zealand in captured in figure 1. New Zealand economy accounted a growth rate of 4.58 percent in 1995. Inflation during this year was 3.76 percent. After accounting three consecutive years of slow growth rate in 1996, 1997 and 1998 economic growth again recovered in 1999 to 5.19 percent. The inflation rate during this year was as low as 0.28 percent. Most of the times inflation rate has been found to move in opposite direction of economic growth. After global financial crisis, economic growth and inflation rate both settled at a relatively low level. However, given the resilient nature of the New Zealand economy economic growth recovered and matched the pace of economic growth of advanced nations (Cacciatore, Ghironi and Turnovsky, 2015). Central Bank of New Zealand actively involved in controlling the inflation rate through monetary policy design. Consequently, economic growth and inflation both has stabilized due to internal strength and monetary policy design. 

Unemployment rate is an indicator of the status of labor market in a nation. People are identified as unemployed when they are actively involved in the labor market, looking for jobs but are unable to find a suitable one at the present market equilibrium wage. In determining rate of unemployment, unemployed persons in the labor force are presented as a percentage term of total labor force (Mankiw, 2015). Economic activity of two nations often found to be interrelated depending on economic relations among nations. Relation between Australia and New Zealand can be explained in terms of their trade and investment relation. New Zealand provides a lucrative market to the Australian exporter. Foreign investment in New Zealand and Australia are dependent on each other.

Analysis of GDP Growth and Inflation in New Zealand

Summary of unemployment in Australia and New Zealand is given in table 3

Table 3: Summary and descriptive statistics of unemployment in Australia and New Zealand

Average unemployment rate in Australia in the selected time range is 6.09 percent. In New Zealand, the average unemployment rate in New Zealand is lower compared to that in Australia. The average unemployment rate is 5.53 percent. Standard deviation represents the stability in the trend unemployment rate. In Australia, unemployment series has a standard deviation value of 1.29. The same for New Zealand is marginally smaller to 1.16. However, for both the nation, measured standard deviation is lower compared to its average indicating a stable series of unemployment for both Australia and New Zealand (Carvalho, 2015). The unemployment rate in Australia ranged between 4.23 and 8.51 percent. In New Zealand, the corresponding range of unemployment is between 3.60 and 7.72 percent.

The unemployment relation in both the nation can further be explained with the pairwise graph showing trend in unemployment in both Australia and New Zealand.

Figure 3: Pairwise graph of unemployment rate in Australia and New Zealand

As revealed from the pairwise graph, unemployment tends to be higher in Australia compared to that in New Zealand. Unemployment in Australia was significantly above the trend unemployment rate in New Zealand. For the three years, 1998, 1999 and 2000 unemployment in New Zealand is closer to the unemployment rate in Australia. This was the phase when Australia’s unemployment declined while that in New Zealand increased. The fast economic growth of New Zealand helped the economy to lower the unemployment rate (Healy, 2016). Following a strong labor market performance, New Zealand’ unemployment went below the unemployment in Australia. It was in the year 2008 when unemployment in the two nations became close to each other. In the four consecutive years after global financial crisis, unemployment in New Zealand remained above trend unemployment rate in New Zealand. Australian economy suddenly experienced a slow-down in the growth rate due to change in domestic and global economic condition (Akbari and MacDonald, 2014). The slower pace of economic growth affected the labor market causing unemployment rate to increase and Australia’s unemployment exceeded the unemployment in New Zealand. 

The central monetary authority in Australia is the Reserve Bank of Australia. The authority uses overnight bank rate termed as cash rate to control inflation in the economy. RBA‘s target is to maintain an inflation rate between 2 and 3 percent on an average (Lin and Cheng, 2016). The inflation target is accomplished by suitable adjustment in the cash rate. The Reserve Bank of New Zealand is the monetary authority in New Zealand. Instrument used by Reserve Bank of New Zealand is the official cash rate. It is the overnight bank rate used in New Zealand. Monetary policy is adjusted depending on the inflation rate the economy. The targeted inflation rate in New Zealand is between 1 and 3 percent. In times of global economic shocks, monetary policy decision of central bank of different nations coincide. Central banks of advanced nations often follow the monetary policy decision of each other to maintain internal balance within the economy (Berument and Froyen, 2015).

Unemployment Trends in Australia and New Zealand

The result of summary statistics of cash rate and official cash rate for the period from 1995 to 2015 is given in the table below

Table 4: Summary of cash rate and official cash rate

The summary statistics of cash rate and official cash rate shows that average cash rate in Australia for the selected period of time is 4.85. Average official cash rate is closer to overnight rate in Australia with estimated average being 4.84. Standard deviation representing variability in the data series is estimated to be 1.42 and 1.74 for Australia and New Zealand respectively (Reserve Bank of New Zealand, 2018). Cash rate in Australia varied from 2.1 percent to 7.50 percent. The range for official cash rate extended from 2.50 percent to 7.94 percent.

The tendency of monetary policy in Australia and New Zealand is summarized in the following pair-wise graph

Figure 4: Trend in cash rate and official cash rate

In the beginning of 1990s, both Reserve of Australia and that of New Zealand both took an easy monetary policy in terms of lowering overnight bank rate. Since 2001, coordinated monetary policy movement of central bank of Australia and New Zealand no longer hold. In the May 2002, government of Australia tightened the monetary policy (Reserve Bank of Australia, 2018). During this time the same policy stance is also observed in New Zealand as well. The decision of Reserve Bank of New Zealand however had taken almost 50 days prior to decision in Australia. In New Zealand, official cash rate increased to 5.00 percent during this time. The bank rate in Australia during this time was 4.50 percent. The coordinated monetary policy decision was again taken in 2006 (Benetrix, Lane and Shambaugh, 2015).  The central bank of New Zealand increased the interest rate in 2014 to 3.2 percent from 2.5 percent in 2013. Reserve Bank of Australia on the other hand continued to lower the cash rate to stimulate economic growth. 

The tight monetary policy is implemented by lowering the overnight bank rate. An increase in bank rate increased the borrowing cost. As borrowing cost increased, investment lowered leading to economic contraction (Johnson, 2017). Official cash rate in New Zealand is higher compared to relevant bank rate in Australia. This indicates a tighter monetary policy in New Zealand.

Australian economy though has experienced a relatively slower growth rate in last few years still future outlook of the economy is positive. Australian economy is expect to hit a growth rate around 3 percent in the next few years. The positive outlook of the economy has been gained from strong investment other than housing and mining (Tradingeconomics, 2018). In addition to strong economic growth a relatively stable economic state is likely to be maintained by a lower inflation and associated lower unemployment rate. The outlook for New Zealand economy is also positive. The labor market status in New Zealand has strengthened by inflow of migrants. Economic growth is further strengthened by the increase in service export especially tourism, ease monetary policy and other positive factors. Rate of inflation and unemployment will also be in stable position (OECD, 2018).

Summary Statistics of Unemployment Rates in Australia and New Zealand

Conclusion 

Australia and New Zealand are two of the advanced nations in world. The report makes a brief evaluation of economic performances in the two nations. In both nations, growth in the real GDP is mostly inversely related with the inflation rate. One reason for this is the intervention of monetary authority to keep inflation rate at the low level. Average unemployment rate in Australia is higher than that in New Zealand. Monetary policy is one important policy tool in both Australia and New Zealand. In recent years, monetary policy in Australia is tighter than New Zealand because of a relatively slower growth rate in Australia. Neither of the two economies is currently facing a recessionary threat. Rather there is a positive outlook for future economic status. 

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