Analysis Australian Economy

Business Cycle Properties and Macro Forecasting of the Australian Economy

Executive Summary

Business cycle properties and the macro forecasting of the economy of Australia can be appropriately accomplished utilising the necessary parameters or economic indicators. Hence the ability to effectively use these economic indicators facilitates precise and accurate forecasting of the economy.  Therefore, these economic indicators have been widely used in the process of forecasting the direction which is likely to be taken by a country’s economy.

In this report seven major economic indicators have been considered to enable forecasting of the Australian economy using judgemental approach. These economic indicators include: inflation rate; private final consumption; inventory investment; gross fixed investment, nominal exchange rate between Australia and the United States; unemployment rate as well as labour productivity. The utilisation of these economic indicators has played a significant role to facilitate forecasting of the Australian economy through their keen evaluation and detrending. Analysis Australian Economy

Introduction

Conducting effective analysis of economic indicators of any country is one of the most appropriate ways of forecasting the future performance of such economy. This approach has often been used to predict the expected performance of the Australian economy in future for quite some time (Fisher, Otto and Voss, 1996). Hence the practice of utilising business cycle properties in the forecasting of the economy in Australia is widespread. In particular, three approaches are essentially used in the forecasting of a country’s macroeconomics such as: judgemental forecasting, statistical forecasting, and model forecasting. However, judgemental forecasting which is going to be used in this report analysis involves gathering various kinds of data and information from official sources, to aid future macroeconomic forecasting activity on the basis of one’s informal judgement concerning the way in a country’s economy works (Evans, 2009). 

Analysis Australian Economy

However, there are certain properties of business cycles which enable them to be effectively used in combination with other economic indicators in the forecasting of the economy (Evans, 2009). For instance, the business cycle properties used in facilitating the forecasting of the Australian economy include: aggregate economic activity fluctuations; business cycles are not periodic but recurrent; business cycles contraction/recession and expansion/boom meaning they have a trough and a peak both of which act as the turning points; business cycles are indicative of economic activity persistence and also business cycles have comovements of many macro variables (Edey, 5). Thus, the significance of conducting this empirical analysis of the Australian economy is to reiterate the fact that as an economist whether in the government or private sector, often analysis of economic information, data and policies will be inevitable in order to enable the process of making informed managerial or economic decisions (Fisher, Otto and Voss, 1996). 

Therefore, this report will specifically consider certain economic indicators as means of forecasting Australian economy such as inflation rate, private final consumption, inventory investment, gross fixed investment, nominal exchange rate between Australia and the United States, unemployment rate and labour productivity. 

Analysis

Inflation rate

Analysis Australian Economy

Table 1: Analytical measures of consumer price inflation (CPI)

QuarterlyThe rate of quarterly consumer price inflation (CPI)
Mar 19960.4
Jun 19960.7
Sep 19960.3
Dec 19960.2
Mar 19970.2
Jun 1997-0.3
Sep 1997-0.4
Dec 19970.3
Mar 19980.3
Jun 19980.6
Sep 19980.2
Dec 19980.5
Mar 1999-0.1
Jun 19990.4
Sep 19990.9
Dec 19990.8
Mar 20003.8
Jun 20003.7
Sep 20000.3
Dec 20001.1
Mar 20010.8
Jun 20010.3
Sep 20010.9
Dec 20010.9
Mar 20020.7
Jun 20020.7
Sep 20021.3
Dec 20020.0
Mar 20030.6
Jun 20030.5
Sep 20030.9
Dec 20030.5
Mar 20040.9
Jun 20040.5
Sep 20040.4
Dec 20040.8
Mar 20050.7
Jun 20050.6
Sep 20050.9
Dec 20050.5
Mar 20060.9
Jun 20061.6
Sep 20060.9
Dec 2006-0.1
Mar 20070.1
Jun 20071.2
Sep 2007-0.3
Dec 20070.1
Mar 20080.5
Jun 20081.0
Sep 20080.5
Dec 20080.9
Mar 20090.6
Jun 20090.7
Sep 20090.4
Dec 20091.6
Mar 20100.9
Jun 20100.6
Sep 20100.0
Dec 20100.1
Mar 20110.5
Jun 20110.9
Sep 20110.6
Dec 20110.0
Mar 20120.1
Jun 20120.5
Sep 20120.4

Source: The Australian Bureau of Statistics (ABS)

Inventory investment 

Inventory investment in the business cycle refers to the inventories as all materials such as finished goods that are business owned and work in progress, whether at business locations or elsewhere.  The business holds these items anticipating selling a product.  However, inventory investment is usually regarded as an additional contribution to GDP. Fluctuations in inventories which an often phenomenon plays a significant role in the amplification and exacerbation of the business cycle as well as continuing to significantly affect GDP growth   negatively at times of economic downturn (Evans, 2009).

 Gross fixed investment

Gross fixed investment involves the entry records totalling to business spending based on fixed assets, such as machinery, factories, dwellings, equipment and raw materials inventories, which are essential in providing the basis for production in future (Evans, 2009). Therefore, gross fixed investment is measured gross asset’s depreciation including investment that is necessary as a mere replacement of scrapped or worn-out capital.

Table 2: Gross fixed investment rate and percentage 

YearInvestmentPer cent Change
199624.318-1.91 %
199624.3180.00 %
199723.855-1.90 %
199723.8550.00 %
199825.988.91 %
199825.980.00 %
199926.1290.57 %
199926.1290.00 %
200024.803-5.07 %
200024.8030.00 %
200123.19-6.50 %
200123.190.00 %
200224.8257.05 %
200224.8250.00 %
200326.6187.22 %
200326.6180.00 %
200427.0381.58 %
200427.0380.00 %
200527.8553.02 %
200527.8550.00 %
200627.549-1.10 %
200627.5490.00 %
200729.2596.21 %
200729.2590.00 %
200829.5410.96 %
200829.5410.00 %
200927.853-5.71 %
200927.8530.00 %
201027.592-0.94 %
201027.5920.00 %

Source: The Australian Bureau of Statistics (ABS)

 Nominal exchange rate between Australia and the United States dollar

The nominal exchange rate is the value at which a currency of one country exchanges with that of the other country. For instance the nominal exchange rate between the Australian and United States dollar is the value at which the Australian dollar exchanges with that of the United States. The nominal exchange is an economic indicator because it implies the strength of the local currency against other global currencies. The higher the demand of the local currency, the higher the value meaning the economy is stronger.  As shown in the table below outlining the quarterly exchange rates between the Australian and United States dollar from the year 1996 to present it is evident that there is significant variation even though there is a gradual progressive decline in the value of the Australian dollar against the united stated dollar. This may imply a weakening of the Australian economy against that of the United States. 

Table 3: Exchange rate between Australian dollar and the US dollar

QuarterlyExchange rate between Australian dollar and the US dollar
Mar 19960.7793
Jun 19960.7890
Sep 19960.7924
Dec 19960.7965
Mar 19970.7865
Jun 19970.7455
Sep 19970.7198
Dec 19970.6527
Mar 19980.6634
Jun 19980.6135
Sep 19980.5945
Dec 19980.6139
Mar 19990.6293
Jun 19990.6596
Sep 19990.6536
Dec 19990.6538
Mar 20000.6055
Jun 20000.5986
Sep 20000.5433
Dec 20000.5540
Mar 20010.4890
Jun 20010.5075
Sep 20010.4923
Dec 20010.5106
Mar 20020.5316
Jun 20020.5648
Sep 20020.5435
Dec 20020.5662
Mar 20030.6036
Jun 20030.6674
Sep 20030.6801
Dec 20030.7500
Mar 20040.7589
Jun 20040.6889
Sep 20040.7147
Dec 20040.7790
Mar 20050.7719
Jun 20050.7636
Sep 20050.7615
Dec 20050.7337
Mar 20060.7159
Jun 20060.7433
Sep 20060.7480
Dec 20060.7913
Mar 20070.8070
Jun 20070.8487
Sep 20070.8827
Dec 20070.8816
Mar 20080.9180
Jun 20080.9626
Sep 20080.7996
Dec 20080.6928
Mar 20090.6873
Jun 20090.8114
Sep 20090.8801
Dec 20090.8969
Mar 20100.9159
Jun 20100.8523
Sep 20100.9667
Dec 20101.0163
Mar 20111.0334
Jun 20111.0739
Sep 20110.9781
Dec 20111.0156
Mar 20121.0402
Jun 20121.0191
Sep 20121.0404

Source: Reserve Bank of Australia

 Unemployment rate

The Australia’s unemployment rate which can be seasonally adjusted increased to 5.4 per cent in September, according to the Australian Bureau of Statistics (ABS) results that were released on October 11. However, there has also not been a widespread unemployment rate in Australia and as ABS reports in September there was an increase in the number of people employed from 14,500 to 11,511,900 as a result of full-time employment increase. Moreover, there was also an increased in the unemployed people by 38,800 in September only. Therefore, the ABS monthly aggregate of the number of hours worked, it is evident that a considerable number of hours are used at work at work places in both part time and full time employment places.  In addition, according to the Australian Bureau of Statistics (2012) the labour fore participation rate which can be seasonally adjusted increased to 65.2 per cent in the month of September.

Table 4: Australia unemployment rate

QuarterlyAustralia unemployment rate
Mar 19968.2
Jun 19968
Sep 19968.3
Dec 19968.4
Mar 19978.4
Jun 19978.2
Sep 19978.1
Dec 19977.9
Mar 19987.9
Jun 19987.7
Sep 19987.3
Dec 19987.1
Mar 19996.7
Jun 19997
Sep 19996.5
Dec 19996.6
Mar 20006.2
Jun 20006
Sep 20006.3
Dec 20006.5
Mar 20016.9
Jun 20016.8
Sep 20017
Dec 20016.4
Mar 20026.5
Jun 20026.3
Sep 20026.2
Dec 20026.1
Mar 20036.1
Jun 20035.8
Sep 20035.5
Dec 20035.4
Mar 20045.5
Jun 20045.4
Sep 20045.1
Dec 20045.2
Mar 20055
Jun 20055.1
Sep 20055.1
Dec 20054.9
Mar 20064.8
Jun 20064.7
Sep 20064.6
Dec 20064.4
Mar 20074.3
Jun 20074.2
Sep 20074.2
Dec 20074.1
Mar 20084.2
Jun 20084.3
Sep 20084.6
Dec 20085.7
Mar 20095.8
Jun 20095.7
Sep 20095.3
Dec 20095.4
Mar 20105.1
Jun 20105.1
Sep 20104.9
Dec 20104.9
Mar 20114.9
Jun 20115.2
Sep 20115.1
Dec 20115.2
Mar 20125.1
Jun 20125.1
Sep 20125.4

Source: Reserve Bank of Australia

 Labour productivity

Improved labour productivity usually leads to a strong gross domestic product (GDP) result. For instance, in the second quarter of 2011 there was a tremendous increase in the labour productivity in Australia by 1.5% leading to an adjustment of the inflation. Thus labour productivity can be described as generated output in a single hour of work which is being undertaken. According to Australian Bureau of Statistics (2012) from which the data used to generate graph below was obtained the month of June 2011 recorded a tremendous fell of national labour productivity which represented the second worst annual performance of the labour productivity since the year 1996. A high labour productivity implies increased production at reduced cost a phenomenon which is very appropriate for the economy growth.

Graph 1: Annual labour productivity  

Source: Reserve Bank of Australia

Private final consumption

Private financial consumption and especially the private financial consumption expenditure have been widely used as an essential economy indicator. Thus, it can be used in forecasting where the economy is headed. 

Table 4: Private consumption expenditure volume index in Australia

PeriodPrivate consumption expenditure volume index in Australia
2005-06122.3
2006-07127.2
2007-08131.9
Seasonally adjusted
2006-2007DecemberMachJune126.9
128.3
129.0
2007-2008SeptemberDecemberMarch130.4
132.0
132.7
2008-2009JuneSeptemberDecember132.5
132.6
132.7

Source: The Australian Bureau of Statistics (ABS)

Conclusion

In conclusion, the business cycle properties in addition to the judgemental forecasting approach utilised in this report can be effectively used to predict the future economy performance in a precise manner. 

Bibliography

Australian Bureau of Statistics, (2012), Australian Economic Indicators. Retrieved on 15th October 2012 from:  http://www.abs.gov.au/AUSSTATS/abs@.nsf/mf/1350.0?opendocument#from-banner=LN

Edey, M.  “The Economy in Late 2008: Conditions and Prospects”, Australia & Japan Economic Outlook Conference 2008, Sydney – 19 November, http://www.rba.gov.au/Speeches/2008/sp_ag_191108.html

Evans, W. (2009), “We have revised our growth and rate forecast”, unpublished report by Westpac, 28 January.

Fisher, L., Otto, G. and G. Voss (1996), “Australian Business Cycle Facts”, Australian Economic Papers, 35(67), 300-320.

Reserve Bank of Australia, (2012), Statistical tables. Retrieved on 15th October 2012 from: http://www.rba.gov.au/statistics/tables/index.html#prices_inflation

Watson, M. “Macroeconomic Forecasting”, entry for The New Palgrave Dictionary, 2nd edition, edited by Lawrence Blume and Steven Durlauf.

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