Discuss about the Dissecting Models Forecasting Performance.
The objective of this study is to analyze economic growth of Australia in the last 3 to 5 years. Australian economy is considered as most developed and biggest mixed market nations around the globe. This nation is the second wealthiest economy as measured by wealth per persons. The total wealth of Australia in the year 2016 resulted to AUD $8.9 trillion and hence it was 14th biggest economy in terms of nominal GDP. In addition, this nation ranked 20th as accounted by PPP adjusted GDP and was ranked 25th and 20th in terms of exporter and importer. Over the last 3 to 5 years, Australia record for uninterrupted GDP growth after the recessionary phase. This economy is mainly controlled by the service sector that contributes to 61.1% of real GDP and employs 79.2% of workforce in the nation. This country has the highest natural resources value that values at US $19.9 trillion in the last year. Despite huge decrease in growth of mining sector during recessionary phase, this nation remains resilient as well as stable over the recent decades. The Australian Securities Exchange in the nation is 16th biggest stock exchange as accounted by domestic market capitalization and has largest market for interest rate derivatives in Asia. This nation has a vivacious free- market democracy that records to huge economic growth unmarred by the recessionary phase for the last 3-5 years. Therefore, economic growth of this nation has been analyzed with the help of macroeconomic indicators that includes GDP growth rate, unemployment rate, rate of inflation and balance of trade.
Economic growth of Australia in the last 3 to 5 years
Australia has been considered as one of the wealthiest country in Asia – Pacific and enjoys huge economic expansion over the last 3 to 5 years. This nation is highly competitive in technology, service and manufacturing sector as compared to other nations. In addition, mining as well as agriculture industry are considered as vital export source and has a huge contribution in the overall income of the country. Australia encourages foreign competition and hence prolongs to be vigorous investment destination. Recent statistics reflects that though the government debt of this nation has been increasing since financial crisis, it records to lower amount as compared to other developed nations. The political environment of Australia is stable as the nation has transparent political processes, sturdy legal system and proficient governance. Moreover, the nation has effective measures of anti-corruption and hence judicial system operates impartially. Furthermore, the regulatory environment in Australia is the most efficient as well as transparent and is favorable to the entrepreneurship. This nation’s labor market is highly flexible and this contributes to increase in employment. Moreover, this economy has recovered from slowdown owing to global recession and has grown with positive trend rate over the last 3- 5 years. Although the different industries in Australia contribute to the growth of the economy, they have sizeable differences in their business performance. Recent study reflects that mining and financial sector output grew at faster rate as compared to manufacturing industries output at an average rate. The economic condition of Australia is analyzed by using macroeconomic indicator given below:
GDP growth rate- Gross domestic product (GDP) refers to the monetary measurement of the value of products and services that is manufactured within the country during a given time period. This macroeconomic indicator aids in accurately indicating the size of the Australian economy and hence GDP growth rate is taken as best macroeconomic indicator of determining economic growth. GDP of the nation fluctuates owing to business cycle. If the economy expands and GDP rises, inflationary pressures rise in rapid way because of full utilization of labor and resources. It has been opined by (), GDP is estimated by the summation of consumer spending, government purchases, investment and net exports. Over the last 3 to 5 years, Australia’s annual GDP growth rate has shown huge variation due to changes in consumer expenditure, business investment, government spending and exports. During the last 5 years, the GDP of Australia expanded owing to rise in expenditure of the Australian government. Consumer expenses were considerably restrained though confidence of consumer was high. Furthermore, the households of this nation became highly vigilant in their financial behavior, less borrowing and huge savings. In the last few years, the savings rate of household had increased by near about 4%. In addition, investment in the housing sector also increased at modest speed despite ageing population growth. The reason behind considerably high housing cost, rigidities in supply process of housing and developers difficulties in attaining finance.
Business investment also increased at high levels during this period. It has been from the recent statistics that the investment of this nation declined during the global financial crisis but has recovered after the recessionary phase. As a result, the business expanded at high pace due to increase in productivity of good owing to huge investment. Investment in mining industries contributes to about one three-fourth percent of the nations GDP at present period and over the last 5 years it had reached to 3% of country’s GDP. Moreover, the exports also increased at higher pace in the mining capacity. Higher price of exports has moved the balance of trade into surplus and this resulted to unusual economic condition in this nation. Although the GDP of this nation increased at faster rate, few states including Queensland lagged with considerably weak growth rate in sales as well as consumption in retail sector. However, Queensland experienced low growth in demand for products while other nations demand grew at high rate in the past five years. This state also suffered from overhang in the market of property after the exuberance period. Currency exchange rate also influenced GDP growth rate of Australia.
Swings in prices of coal as well as iron had vital impact on the economy of Australia as accounted by export revenues as well as real incomes. Ageing population growth contributes to growth in Australian economy that was reflected by 0.4% in GDP per capita. The figure reflects that during the period 2012-2016, the annual GDP growth rate in this nation has shown slight variation. The figure below reflects the GDP growth rate in the year 2014 and 20105 recorded slight low growth rate in comparison with other year.
Unemployment rate- The rate of unemployment refers to the workforce share that becomes jobless with respect to total population and is expressed in percentage. It has been considered as lagging indicator that increases or decreases in variable economic conditions. The unemployment rate increases if the economy health of the country is in bad phase. In addition, if the growth rate of the economy rises at healthy rate, jobs becomes considerably plentiful and this increase the employment rate of the nation. The Okun’s law state that unemployment rate of a particular nation is negatively related with GDP of the nation. This means that if the rate of unemployment rises above the target level that is 5%, then the GDP of the nation falls at high rate. This adversely affects the economic health of the nation.
The above graph reflects that the unemployment rate of Australia has remained stable over the years but it remained above the target level of 5%. In the year 2015, the rate of unemployment increased to 6.3% as full time jobs in the nation decreased at faster rate. But in the current year, the unemployment rate fell to 5.7% owing to rise in part-time work in this nation. There are few reasons that increased the unemployment rate in this nation that includes
Decline in expenditure of public during the recessionary phase shifted the workers of the Australia to other nations and thus ending up high unemployment.
Implementation of new technology by the companies led to increase in jobless rate as the laborers quit jobs as they faced difficulties in adopting with the technology.
Another reason of unemployment in Australia is the shutdown of industry. This had made numerous Australians jobless during this period. For example in South Australia huge people were jobless as insufficient industry was unable to absorb these jobless workers. However, it has been noted that the federal government of Australia could not prepare advanced planning methods to make transition of workforce into other job.
Offshoring is another vital cause of unemployment in this nation. It increased during the years as other nations offered incentives on tax to other countries in order to shift the factories there. However, the workers of Australia have adapted to this as many manufacturing sector adopted this practice for increasing their productivity.
Therefore, the government of Australia must plan proper policies in order to reduce unemployment rate in the nation. Since 2011, the rise in unemployment had been concentrated mostly among male laborers who accounts to high employment percentage in mining as well as other cyclical sectors. One type of unemployment that mainly arises in Australia is frictional unemployment. This occurs when one laborer leaves one job and searches for another job for more than four weeks. Furthermore, structural unemployment also occurs owing to sustained weakness in demand for labour.
Inflation rate- Inflation rate refers to the rate at which the price level of products as well as services increases considerably in a nation over a specific time period. As the price level rises for the products, each currency unit purchases less commodities and this outcomes in decrease in purchasing power in terms of each currency unit. One index that helps the economy in measuring inflation rate is Consumer price index (CPI). Australia usually measures their inflation rate with the help of consumer price index. Inflation influences the nation both positively and negatively. The adverse impact of inflation includes rise in opportunity cost, uncertainty in rate of inflation that might discourage investment as well as savings. On the other hand, the positive effects involve declining real burden of people as well as private debt by maintaining nominal rate of interest above zero. This facilitates the central bank of the nation in adjusting interest rate for stabilizing the economy by reducing unemployment rate owing to nominal wage inflexibility. Economist believes that hyperinflation generally occurs due to excessive growth in supply of money within the country. Low rate of inflation attributes to variation in real demand for commodities or availabilities of supply of goods during scarce situations. Thus, the government of respective nations implements contractionary monetary policy by changing their interest rates with the help of open market operations and reserve requirements of banking.
One of the main aim of Australian government is keep the inflation rate low. The RBA sets the target of inflation rate in Australia by 2-3%. Therefore, higher inflation rate above this target level disrupts equity in income distribution, undermines trade competitiveness and living standards of people in Australia. In addition, lower inflation rate below this set target level highlights that the productive capacity of this nation has been wasted. The average rate of inflation in this nation had been stable over the past few years and records to 3%. The graph below denotes that the rate of inflation of Australia had been lower in the year 2012 and 2013, which reflects that it is below the target level of inflation rate. The Australian Bureau of Statistics (ABS) highlights that inflation rate had increased during these two years due to rise in prices of housing, tobacco and medical services.
The two factors that influence the inflation rate of this country are given below:
- Increase in demand-side condition that might lead to demand inflation
- Low supply-side developments leading to cost inflation
Australia had experienced demand inflation over the last 3 to 5 years. As the circular flow model of Australian economy is five sectors, the demand-side factors resulted in increase in aggregate demand causing demand inflation. As a result, consumer confidence increased that led the Australians to decrease their savings and increase their expenditure. In addition, the business confidence also became stronger and as a result, the company’s benefitted in increasing their sales and attaining higher profit. Moreover, it also resulted to rapid increase in Australians household income and enhanced private consumption expenditure. The RBA lowered the interest rate for encouraging the entrepreneurs and households borrowings. Furthermore, as the inflation rate in this nation remained stable, it had no adverse effect on the business.
Adoption of policies by the Australian government aids to maintain inflation in the nation. Australian government uses aggregate demand policies for slowing demand inflation during the last 5 years. They increased their interest rate to meet excess spending as well as remove products commodities shortages and reduce demand inflation in the country. In addition, Australian government adopts aggregate supply policies for producing huge output from less input. Therefore, they tried to reduce tariff protection in order to decrease production cost. In addition, as the Australian market has oligopoly and monopoly market structures, competing policies tried to reduce production cost and increase efficiency among the firms. They also adopted tax reform policies for decreasing tax rates in order to decrease business cost. Moreover, immigration has been encouraged over the last few years and this facilitates to ease shortaghe of laborer.Overall, it has been noted that Australian government had adopted proper monetary policy in order to maintain inflation arte in the country and this led to rise of economic growth of the country.
Balance of trade- the Balance of trade (BOT) refers to the subtraction between exports and imports of the nation during specific period. It has been noted that, if export value is higher than import value, then it is termed as trade surplus. On the other hand, if the import value is greater than export value of goods , then it is called as trade deficit. BOT has been considered as the key component of nations GDP and thus, deficit in trade reduces GDP and trade surplus increases GDP. Trade deficit increases high debts of the nation or inflation from the nation’s central bank in order to maintain the levels of domestic currency. Recent statistics reflects that trade surplus exists in this nation as this helps the country to improve their economic growth. It has been noted that most of the industries has huge export value as compared to import value. For example, this nation top five industry that contributes in huge export are- Iron ore , natural gas, beverages etc. On the other hand, top five industries that has high import value are- tourism, vehicles, refined petroleum and freight services. Therefore, trade plays a vital role in economic growth of the nation.
Trade improved the GDP growth rate of Australia in the last 3 to 5 years. It accounted for 21 %of GDP and this means that the commodities manufactured in this nation are mainly traded in international countries.
Thus, BOT has huge significance in Australia. These includes-
- It helps the nation in clarifying its rank in foreign exchange
- It also helps the nation in revealing the nature, features and size of this country
- It facilitates the business in evaluating the economic conditions of the country
- It also highlights the competitiveness in international markets within the nation.
From the above study, it can be concluded that Australia has shown good economic growth performance over the last 3 to 5 years. The macroeconomic indicators reflects that the country has maintained stable economic growth rate even though there was huge growth variation across various industries existing in the nation. This benefits of economic growth had spread widely among the states and across distribution of peoples income. Australian government also plays vital role in improving economic conditions of the country. The policies adopted by the government helps the Australian economy to recover from recessionary phase. Even the change in tax structure contributed to expansion of business in this nation. Contractionary monetary policy adopted by RBA also helped the economy in maintaining stable inflation in the nation. At present, the country is now operating to high capacity and this improves the nations productivity and sustains economic growth.
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