Analysis of the Australian Economy

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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

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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)

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).

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 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 

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

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.

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Table 4: Australia unemployment rate

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.

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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.

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

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 15^th October 2012 from: http://www.rba.gov.au/statistics/tables/index.html#prices_inflation

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

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