Key Macroeconomic Indicators In Australia Assessment 3 Answer
The following report discusses key macroeconomic indicators in Australia during the past two decades, that is 2000 till 2020. The special emphasis will be on fiscal deficit, unemployment, cash rates and exchange rates. Further, the interrelationship between various factors will be analysed with focus on COVID-19 pandemic and impact of the fiscal stimulus doled out during the period.
Fiscal Position of the Australian Federal Government with respect to the Cash Rate from 1st July, 2001 till 30th June, 2020
The net lending (or borrowing) as a percentage of GDP of Australia is presented in the below graph for the period of 2001 till 2020 (World Bank, 2020):
It can be seen that net lending stayed positive percentage of GDP till the crash in 2008 when it turned negative, indicating borrowings due to large stimulus packages for the economy. While the position recovered slowly to reach a positive territory around 2018. The positive territory indicates the excess of disposable income over expenditures leading to fiscal surplus and negative territory indicates the shortage of disposable income over expenditures leading to fiscal deficit (Eurostat, 2020).
Whereas, the following chart presents the cash rate from 2001 till 2020 (RBA, 2020):
It can be seen that the cash rate for Australia has continuously declined from around 5.00% during the period of January 2000 to 0.14% during the period of June 2020 (except for peaking around mid of 2008 when the economic recession caused the rates to crash later). Cash rate refers to the rate of interest that a central bank, such as the Reserve Bank of Australia charges to commercial banks in the country for loans. It is popularly also known as the base interest rate or the bank rate. This is because the cash rate is used as the base by commercial banks in order to arrive at the interest rates they will charge to the consumers.
Hence, the central bank of the country can control the cash rate in accordance with the state of the economy so as to control or influence the consumption and saving patterns in the country. If the cash rate is low, this indicates that the commercial banks will also offer loans at lower interest rates. This, in turn, will encourage spending and consumption is the economy. Alternatively, if the cash rate is high, this indicates that the commercial banks will also offer loans at higher interest rates. This, in turn, will discourage spending and consumption is the economy (Reserve Bank of New Zealand, 2020). This is a major instrument under monetary policy of a country whereby interest rates are used to influence key macroeconomic indicators, such as, consumption, spending, saving, employment and inflation etc.
A very high level of fiscal deficit may not be good for an economy because the excess borrowings can lead to increase in interest rates and also crowd out private investment in the process. Ultimately, this can shock the economy to recede. Additionally, there is evidence to indicate that fiscal deficit and rate of interest are positively related, especially in the long run (Rani & Kumar, 2017).
The positive relationship is clear from the above graphs where both interest rates and fiscal deficit seem to be moving in the same direction.
Influence of Fiscal Position and Cash Rate Movement on the Unemployment Rate in the same period
The following chart presents the unemployment rate from 2001 till 2020 (RBA, 2020):
It can be seen from the above graph that the unemployment rate has continuously declined from 6.74% in 2001 to 5.16% in 2019.
As discussed above, an increase in fiscal deficit is believed to increase cash rates or interest rates and also lead to crowding out of private investments. However, a slight fiscal deficit in long run may actually help the economy to grow and reduce unemployment. In fact, in order to reduce unemployment, sometimes a government may be willing to increase the deficit just so to provide employment to the people of the country. This was well seen during COVID-19 pandemic where multiple stimulus packages were provided so as to help keep people employed in these testing times. The companies were encouraged to keep employees on the roll while claiming subsidies and benefits from the government’s fiscal stimulus packages whereby government paid in full or in part for the employees’ salaries and wages (Dang & Wayas, 2018).
Movements in Target Cash Rate from 1st July, 2001 till 30th June, 2020 and influence on the Australian Dollar
The following chart presents the cash rate target from 2001 till 2020 (RBA, 2020):
It can be seen from the above graph that the cash rate target or the interest rate has declined continuously (except for peaking around mid of 2008 when the economic recession caused the rates to crash later) from 5.00% in January 2000 to 0.25% in June 2020. The movement is in-line with the cash rates during the period as seen above. Cash rate target refers to the interest rate or bank rate that is set as a target and the actual cash rate or bank rate keeps hovering around this target. Hence, the target rate actually helps to set a range of interest rate for a period such that there is a floor and ceiling for the interest rate at which the central bank offers loans to commercial banks and also for the interest rate at which the commercial banks lend to consumers. Hence, the interest rates of an economy move within a range and can be influenced through cash rate target (RBA, 2020).
The following graph presents movement in Australian dollar with respect to the US dollar for the period of 2000 till 2020 (RBA, 2020):
The exchange rate refers to price of one currency with respect to another currency. For example, above graph shows price of the domestic currency, that is Australian Dollar, with respect to the foreign currency, that is, the US Dollar.
From the two graphs above, it can be seen that the cash rate target and the exchange rate movement seem to move similarly in terms of direction. This is because, a lower cash rate target indicates lower interest rates in the economy which in turn, indicates lowered rate of return on Australian assets and investments. This may make Australian investments less attractive and will also lead to decline in demand for Australian dollars as the investors will tend to look for better investment prospects. Hence, the Australian currency will depreciate in value. Alternatively, a higher cash rate target indicates higher interest rates in the economy which in turn, indicates higher rate of return on Australian assets and investments. This will make the Australian investments more lucrative and will also lead to increase in demand for Australian dollars as the investors will tend to invest more. Hence, the Australian currency will appreciate in value. Hence, lower cash rate target means lower exchange rate and vice versa (Atkin & Cava, 2017).
Australian Government’s Fiscal Spending during COVID-19 pandemic
In order to combat COVID-19 pandemic that has caused mandatory lockdown and jilted the global economies badly, almost every major economy has doled out fiscal stimulus packages in a bid to stabilise the economy. Australian government has done the same by giving out multiple stimulus packages. The extent of packages across economies can be seen from the below table that lists out fiscal stimulus packages given till now (PRD Research, 2020):
As of March of this year, Australia had provided fiscal stimulus packages to the tune of $190 billion which accounts for almost 10% of the GDP. This has helped in controlling unemployment to a large extent and also increasing purchasing power through tax cuts and reduced interest rates in the economy.
However, the huge deficit created in the economy will not be an easy luggage and it will take years for the economy to recover from the setback. It will not only lower the growth rate of the economy but may also lead to depreciation of the exchange rates. The economy may be less attractive to investors due to low interest rates. However, given the current scenario, there would have been very few alternatives other than fiscal stimulus so as to stop the economy from plunging into recession.
From the above discussion, it was found that various macroeconomic key indicators such as fiscal position, cash rate, cash rate target, unemployment and exchange rates are intricately linked to one another. Changing one indicator with an intent to help the economy may sometimes not have the desired impact or impact may not be as strong. This is because of inter-relationship of various factors. Hence, economy is quite complex and fiscal deficit may sound negative but may be actually good in long run. But fiscal deficits as large as seen during COVID-19 pandemic may be counter productive in long run if the fiscal policy is not managed proactively.