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23706 EFM Business Report

Economics for management 23706

Latest economic condition in Australia and how it affects the interest rate
movement by the reserve Bank of Australia

Prepared by
Team Name: Bangladesh
Family name

Name

Student Number

Shifat

Md salah
Uddin
Md Tanzir

99159701

Ahamed

Signature

99159814

Lecturer: Dr. Ana Klimova / A/Prof Len Perry / Harry TSE (please circle)
Class enrolled details: Day and Time Monday and 2.00 PM
We certify that our essay is expressed in our own words having
regard to the information available in the references.

MD Salah Uddin Shifat (99159701). MD Tanzir Ahamed (99159814)

23706 EFM Business Report

EXECUTIVE SUMMARY
This paper is instrumental in advising on the economic situation of Australia
for year 2015, since June quarter and also forecasts the cash rate movement
of the Central Bank towards the end of 2015. It is seen that the GDP of
Australia is not reaching the expected 5% as the growth has slumped to
0.5% quarterly which annualizes to a total of 2% which is way beneath the
required target, as a result, unemployment rate is growing and investment
has slumped. In contrast, national domestic expenditure has yet to show any
decrease, because families are still spending money in recreation and other
domestic expenses. The net growth has been mostly supported by this
factor, as well as the steady performance of the net export. Resulting from
the higher price of automotive fuel consumer price inflation has also picked
up in June quarter to 0.8%. The paper, in conclusion, advises on the
appropriate expansionary monetary policy for the current economic
situation, to increase the supply of cash.

MD Salah Uddin Shifat (99159701). MD Tanzir Ahamed (99159814)

23706 EFM Business Report

Introduction
For the policy makers of any country it is elementary to be aware of latest
economic situations. It helps in decision making as well as makes preparing
for the future, both short and long term, much easier. For several years,
although there has been a little decrease in the June quarter, growth of
Australias major trading partners remains close to its long-run average.
Australia is heading towards an economic downturn. We have found that the
growth of GDP in Australia has not been on par with the expectation. As a
result there has been more unemployment and as a result economy is
suffering a setback. Now a lot of it has to do with the other major players in
world economy, as the economy all over the globe is closely affected by each
other because of globalization. On the basis of relevant data, this paper will
make plausible predictions about the Cash rate movement of the central
bank for the end part of 2015.

MD Salah Uddin Shifat (99159701). MD Tanzir Ahamed (99159814)

23706 EFM Business Report

Body
The latest GDP figures published by the Australian Bureau of Statistics shows
how poorly the economy is currently fairing. In December quarter, it shows a
growth by a paltry 0.5%. If we take a close look at the trend, in 2014, the
growth has been of just 2.3%. Also there has been surprising lack of shift in
the value of our currency.
4.5
4
3.5
3
2.5
2
1.5
1
0.5
0
40603
40787
40969
41153
41334
41518
41699
41883
40513
40695
40878
41061
41244
41426
41609
41791
41974

The fact that the economy is weak is not unknown to the market as well.
Occasional weak periods in growth can be acceptable. But six of the last ten
quarters has seen GDP grow by less or around 0.5%. The requirement for the
GDP growth to rein in the unemployment rate is 3.1%. So a quarterly growth
of 0.5%, annualizing to 2.0% is not enough. The prices of commodities have
shown a dramatic slump, despite which the export volume has done
considerably well. The growth of export last year has been 7.2% after being
adjusted seasonally, even though the trend would suggest that the average
growth is around 5.3%.
MD Salah Uddin Shifat (99159701). MD Tanzir Ahamed (99159814)

23706 EFM Business Report

10
8
6
4
2

Seasonally adjusted
Trend

0
40695 40878 41061 41244 41426 41609 41791 41974
40603 40787 40969 41153 41334 41518 41699 41883
-2
-4

The terms of trade which measures the price of imports compared to the
price of exports, has fallen down by 10%. It is not as bad a drop considering
the fall in the oil price, one of our imported commodities. When we measure
the net export, which is the difference between the import and the export,
we see a substantial contribution of 1.4% in the overall growth. Considering
the trend, it is a steady and stable sector. Australia has experienced the
strongest growth in the household expenditure of 2.7% since 2001, which is
remarkable considering that consumer confidence is quite low, the
unemployment is on the rise, also the retail sales data has been
disappointing. The net growth has even bigger a contribution from household
expenditure than that of net export. The bulk of this growth came from the

MD Salah Uddin Shifat (99159701). MD Tanzir Ahamed (99159814)

23706 EFM Business Report

spending at recreation and rent, at 0.5% of an overall 2.7%.

7
6
5
4
3

Seasonally Adjusted
Column1

2
1
0
365863722638596385043914239783404224106141244
-1

Consumption on smoking and tobacco has fell by almost 8.9%.In the first
part of 2015 growth in the Major Trade partners of Australia remained quite
similar to their long-run stable, current quarters, advance economies have
held off, While rising ones has shown signs of reduction. Economy in China
particularly in resource-intensive sectors, has carried on to moderation in the
first part of the year, which in eventuality, has led to setting up various
policies to adjust more support for work. The economy that has recovered
since the last year is the Japanese, although the rest of the Asia-pacific has
faced a slump in its average growth in last decade. The economy of Europe,
especially the euro areas, have grown gradually over the years, while
MD Salah Uddin Shifat (99159701). MD Tanzir Ahamed (99159814)

23706 EFM Business Report

economic growth in the United States recovered to get level to the growth
documented in 2014 following some weakness in the March quarter. Global
trade growth has fallen down during the first quarter of 2015, as has growth
of global industrial production. The commodity prices enjoyed a decline as a
direct result of the weak Chinese demand. Oil price experienced a significant
drop during 2014 and as of yet the price is still quite low. This will benefit
most of Australias MTPs as they are mostly importers and the low cost of oil
will help support their growth. From the global headline inflation a lot of the
downward pressure has passed, although it is still evident in year-ended
inflation rates. In majority of the economies inflation has remained below the
target eyed by the central bank and core inflation has remained considerably
steady in advanced economies.
In the first half of the 2015, the economic growth of Australias MTPs
remained similar to their long-run trend. Advanced economies have, in
general, continued to recover, the emerging economies has shown lack of
growth in recent quarters. To provide better assistance in growth China has
taken different policy settings in carrying economic activity. The economy of
another prolific country, Japan, has grown steadily whereas in other Asiapacific nations the growth has been slumped. The United States of America
has regained its growth rate which was recorded at the back end of 2014
after some setbacks, whereas European economy has gradually continued to
recover. Global trade has been stuttering in the first part of 2015, the same
can be said for global industrial production. There have been signs of
weakness in Chinese demand which has directly affected the prices of the
commodities. After the significant drop over the latter half of 2014, prices of
oil are at a comparatively low level. This is likely to continue to support
growth in most of Australias trade partners as they are importers. Much of
the downward pressure on global headline inflation from low oil price has
gone away, although it is still evident in year-ended inflation rates. In
advanced economies core inflation has remained relatively stable in yearMD Salah Uddin Shifat (99159701). MD Tanzir Ahamed (99159814)

23706 EFM Business Report

ended terms and remains below the targets set by central banks in most
economies.
Household sectors and business has been continuously supported by
Australian market. Bonds issued by government, non-financial corporations
and banks shown better yield than what it was in early April, it is still one of
the lowest in history. As a reflection of the gradually easing monetary policy
in the first part of the year, rates of interest on owner occupier housing and
business loans have decreased noticeably; the growth in housing lending has
continued to grow. Business lending is slowing down in recent times, whereas
issuance corporate bond has increased this year to date. In relation to
international developments Australian equity prices has shown little change
over the recent months and there has been an increase in volatility.
Earlier this year the cash rate target has been cut down from 2.25% to 2.0%
in two different steps, Since May 2015, the Reserve Bank has sustained the
cash rate target at 2 per cent. There is a chance of reduction in the cash
movement as suggested by the rates in overnight indexed swaps (OIS). In
the recent quarter rates on bank bills and certificates of deposit remain low
and have not changed. Australian government security (AGS) has
experienced some volatility as yet reflects the yields from international
sovereign market.
After staying low over past year due to temporary factors, headline inflation
has picked up again. Underlying inflation has been little changed for the past
few quarters. The inflationary pressure on domestic level is well under
control, alongside with the spare capacity in the labor market. Another
worrying factor is the lack of growth in wage, which has remained quite low
for last quarters. A salient anomaly to the moderate domestic inflationary
pressures is the cost associated with new housings. Due to the depreciation
of Australian dollars since 2013 import sector is facing inflationary pressure.
In June quarter to 0.8 percent consumer price increases pulled out in
seasonally adjusted this increase was a result of higher prices for automotive
fuel.
MD Salah Uddin Shifat (99159701). MD Tanzir Ahamed (99159814)

23706 EFM Business Report

In my opinion, if the Reserve Bank of Australia bought securities from the


private banks in the open market, reserve deposit of the private banks will
increase. The supply of money will thus increase through money multiplier
mechanism. For the purpose of bringing back money market in equilibrium,
interest rate shall also reduce. As a result of the lower interest rate,
expenditure, both individual and invest, will increase. Therefore, it will solve
problems such as unemployment. As a result of these steps, the GDP will
grow, together with, aggregated expenditure and aggregated supply.

Conclusion
To sum it up, it can be said that by the constantly plummeting and
underperforming GDP, with an increasing rate of unemployment and with the
influence from the Major Trading partners in international market, Australia is
currently passing through an economic contraction, which is quite expected
in this Boom-or-bust economic world. But with proper steps the problems can
be mitigated to a controllable level. It will eventually start recovering once
we give more attention towards increasing employment, as a consequence,
and GDP. Economic growth is not a perpetual phenomenon, throughout
history there has been ups and downs even in the most economically stable
nations. Although Australia is far from facing a recession, the signs are still
worthy of garnering concern. As I have suggested in the aforementioned
MD Salah Uddin Shifat (99159701). MD Tanzir Ahamed (99159814)

23706 EFM Business Report

paragraph, quick and necessary steps has to be taken to nip this in the bud.
Through this process an avoidable crisis can be averted, as well as, the
economic situation can be brought back to the desired trend of growth.

MD Salah Uddin Shifat (99159701). MD Tanzir Ahamed (99159814)

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