The Current Economic Situation in Australia - Case Study Example

Advising Board of Members on an Economic Development By submission Advising Board of Members on an Economic Development Executive Summary A positive economic performance of any economy is desirable all over the globe. However, due to reduced global oil prices, the rate of interest has dropped making it favorable for borrowers. Unfortunately, the Australian economic performance has been shrinking and greatly affected the investment in the mining industry. On the other hand, the real disposable income in the household sector has increased by 2.75%. The disposable growth income reduced together with the consumer price index in 2014. The rate of inflation decreased by 2.25% and a shrinking of the labor market was noted. The cash rate or the interest rate of monetary policy has been stable for the past financial year and half, and the board had already taken some time to evaluate the implication of substantially reducing the rate of interest on the monetary policy. Finally, the Reserve Bank of Australia has done a crucial job in controlling the lending rate by reducing the cost of borrowing. Also. Since the Australian dollar was week against the U.S dollar, the reserve bank operated with favorable monetary policies to prevent the collapse of the Australian Economy. Therefore, the economy is stable and there is a predictable growth in the first half of 2015. The growth will boost investment, the rate of return to commercial banks and employment. Introduction One of the most important elements in the performance of any economy is the amount of workforce or the employment status of the population. High level of employment results in a high output of the economy and consequently a high level of development. However, the level of employment is not the only determinant of economic growth, especially when it comes to global markets. The prices of oil have proved to a significant determinant of macroeconomics and research has already pointed out that the increase in the prices of oil is hazardous to global markets. The prices of commodities have been observed to decline and the price of oil has significantly fallen over the last couple of months; which has resulted to a lower level of demand as a result of high level of supply. Interestingly, since oil is arguably the core driver of any economy, lower price of the energy is tipped to strengthen the global output and the rates of inflations are temporarily expected to fall. This study will look to explain the current economic situation in Australia and making a forecast for the rates of cash of the Central Banks, keeping in mind the drop in the prices of the oil in the global market. Fiscal Restraint With the cost of oil falling in the global market, global financial conditions have been very conducive and the rates of borrowing for a couple of major sovereign major reaching a considerable low. Further, the financial costs for creditworthy borrowers are expected to remain remarkably low. According to the Reserve Bank of Australia, the economic expansion of Australia has been alarmingly slow, although there are some indicators showing some improvements. Mining investment, for example has been noted to have fallen by approximately 10% and the investment by the non-mining companies has remained to be weak. The ongoing fiscal restraint has resulted in the increase of public demand and consequently led to unemployment. The household consumption has been below average in the past year and the rate of employment growth has been rather retarded. The reduced energy cost is expected to offer a substantial support for the consumer spending, but at the same time, decline in the terms of trade can be expected to reduce the growth of income in the country. Real Disposable Income In the household sector, the real disposable income slightly increased by 2.75%, with the growth of labor deteriorating on par with the labor market. Moreover, there was a decline in the interest payments and so has the mortgage rates, providing some support to the measures of disposable growth income. The consumer price index (CPI) recorded the lowest increase for the first time in 2014 after several years and could be attributed to the sharp decline in the prices of oil and the end of the year. A further removal of the price of carbon could also be linked to the low increase in CPI in 2014. A slight decline in the measures of underlying inflation was noted, to approximately 2.25% over the year (Heath, 2015). With the growth of labor costs already subdued, it appears more likely that the rate inflation will remain consistent for next couple of financial years. There was credit growth and it picked up on average rates in 2014, although there was a stronger growth in lending to investors of housing. On the currency front, the Australian dollar has significantly declined against the US dollar in recent couple of months although it is still superior to a handful of other currencies around, especially given the substantial declines in the prices of commodities. There may be required a lower exchange rate to achieve a balanced growth in the economy of Australia. The Cash Rate of the Monetary Policy The cash rate or the interest rate of monetary policy has been stable for the past financial year and half and the board had already taken some time to evaluate the implication of substantially reducing the rate of interest on the monetary policy. The policy had already been put in place and its developments monitored across Australia and in the international front. With the flow of recent information and the updated forecasts, a further reduction in the cash rate is an appropriate call to make as it is likely to add further assistance to demand and ultimately enhance sustainable growth and the inflation outcomes that are in agreement with the target. The Reserve Bank of Australia will be obliged to reduce the cash rate further in coming days then although it is a tough decision to make. Having already reduced the rate to a historic low of 2.25%, the bank will be obliged to reduce that rate to a further 2%, an unbelievable figure (Heath, 2015). This is because there has been an uncharacteristically weak business investment recently according to the report the bank issued. With business investment reaching its peak in late 2012, the current trend in this investment has noticeably deteriorated since then, although it remains admirably high in comparison to other advanced economies around. The run-in in business investment in recent times coincided with a strong growth in the mining industry and with the mining industry declining; the business investment is expected to fall as well. This decline is consistent with other sources, which depict a lack of commitment to mining projects by investors and a low expenditure also being witnessed in development and planning work. Capital Expenditure and Unemployment However, capital expenditure (Capex) survey of the intentions of mining suggests that there was a growth in 2013/14 financial year, although the spending by the mining firms of the same financial year has been found to be lower than that of 2012/13 financial year. The same survey reports an improvement in the expectation of non-mining investment although a spare capacity been reported, which is going to weigh on the expenditure on capital plans. To encourage business investment in the economy, the rates of the Reserve Bank of Australia will be reduced further, so that this deduction attracts borrowing for business invests. This is a reason why the monetary rates are expected to fall to as low as 2% (Mulligan, 2015). Weak domestic growth and the decline in prices of commodities as well as the threat posed by unemployment are expected to coerce the rates to drop further. This drop in the rate of the Reserves Bank of Australia would see borrowers getting the cheapest home loans for after a long time. The aggregate employment has declined in recent times in Australia and it was significantly below its peak in 2012. Unemployment is attributable to various industries including media &telecommunications, professional among others and especially those exposed or linked to mining sector suffering the biggest blow. Similarly, the conditions in the labor market have remained weak in most states and relatively stable in others such as Queensland and Western Australia (Farrer & Jericho, 2015). These unemployment concerns are likely to push the rates of borrowing in the RBA to even lower levels than 2.25% so that investors can access cash for setting up businesses at lower rates and help in reduction of unemployment. Other factors that would lead to the decline in the rate of interest in the monetary policy are among others, trading partners slashing down their rates. China, the biggest trading partner of Australia had surprisingly cut down her interest rates, which would bring problems with the exports, if the interest rates of Australia were not subsequently reduced. With the amounts of exports rising, due to increase in resource, services as well as manufactured exports offsetting a deadline in rural exports. On the other hand, imports were declining; with imports on capital goods, service imports and intermediate goods all dropping. This was one of the reasons which the Reserve Bank considered in making the decision of cutting down the interest rates (Farrer & Jericho, 2015). With the Reserve Bank of Australia releasing its report on lowering its rates, it also gave explanations why. With the growth of economy at a moderate pace in 2014, that was the performance that was expected by all come 2015. The decline in commodity prices resembles a fall in incomes by the households, and a further reduction of energy prices globally, has resulted to a fall in demand and rise in supply. Consequently, a strengthened global output would definitely lead to the decline of price levels. Therefore, with accommodative financial conditions globally, the long-term borrowing rates for several countries should therefore be expected to be low and the creditworthy borrowers will expect this trend to stay for longer. In Australian context, there is a slow economic growth and the demand for domestic product is noticeably weak too. The resulting effect of this scenario is a high unemployment rate and thus the economy is likely to be operating below the full capacity. Having observed this trend, credit is likely to grow and the investors will have an opportunity to invest in housing as the bank will finally offer cheap mortgage cash, while the dwelling prices will remain to be high in the Capital City (Mulligan, 2015). The bottom line is that with the current trend in the Australian economy, the rate of lending of the RBA will likely to reduce further as the levels of unemployment are significantly rising. Conclusion To conclude this study, the paper has put forth explanations on the potential eventuality of the rates of the Reserve Bank of Australia, but looking at the structure of the economy as it is. The drop in the price of energy might have been the bottom line of the predicament facing the economy of Australia as the prices of commodities have been reported to drop. Deterioration of her dollar against the US dollar has also played a part in the dropping of the rates as well as the continued unemployment. This unemployment can be explained to have been caused by the behavior of investors towards mining industries which have left many people unemployed. The reduction of rates of Australia’s major trading partner may have caused the rates to be reduced as well. Given all this evidence provided in the study, the rates of the RBA are expected to remain low. List of references Farrer, M., & Jericho, G. (2015). Reserve Bank cuts rates to 2.25% as economic outlook worsens. Theguardian. Retrieved from http://www.theguardian.com/australia-news/2015/feb/03/reserve-bank-cuts-rates-to-225-as-economic-outlook-worsens# Frazer, S. (2015). Low inflation opens door to further interest rate cuts. ABC. doi:02.04.2015 Greber, J. (2015). RBA set to cut interest rates in April. FINANCIAL REVIEW. doi:March 31 2015 Heath, M. (2015). RBA Cuts Cash Rate to Record Low. Bloombergbusiness. doi:02.03.2015 Hockey, J. (2015). RBA cuts interest rate to historic low of 2.25%. news.com.au. Retrieved 2 April 2015, from http://www.news.com.au/finance/economy/rba-cuts-interest-rate-to-historic-low-of-225-per-cent/story-e6frfmn0-1227206366096 Merhab, B. (2015). RBA will cut rates: economists. INDAILY. doi:2 April 2015 Muligan, M. (2015). More interest rate cuts loom despite housing fears, RBA minutes suggest. The Sydney Morning Herald. doi:March 17 2015 Mulligan, M. (2015). Chances of RBA rate cut firm as confidence falls. The Sydney Morning Herald. doi:April 2 2015 Mulligan, M. (2015). RBA cuts interest rates to record low of 2.25%. The Sydney Morning Herald. doi:February 3 2015 Mulligan, M. (2015). RBA keeps interest rates on hold at 2.25%. The Sydney Morning Herald. doi:March 3 2015 Newman, R. (2015). Heres why the RBA Will Slash Interest Rates Next Week. The Metley Foot. doi:1 April 2015 News.co.au,. (2015). Reserve Bank of Australia keeps interest rates on hold in March. Retrieved 2 April 2015, from http://www.news.com.au/finance/economy/reserve-bank-of-australia-keeps-interest-rates-on-hold-in-march/story-e6frfmn0-1227246314156 Otto, G. (2007). Central Bank Operating Procedures: How the RBA Achieves Its Target for the Cash Rate. The Australian Economic Review, 40(2), 216-224. doi:10.1111/j.1467-8462.2007.00463.x Rba.gov.au,. (2014). Statement on Monetary Policy – February 2014. Retrieved 2 April 2015, from http://www.rba.gov.au/publications/smp/2014/feb/html/dom-eco-cond.html REITZ, S., RÜLKE, J., & TAYLOR, M. (2011). On the Nonlinear Influence of Reserve Bank of Australia Interventions on Exchange Rates*. Economic Record, 87(278), 465-479. doi:10.1111/j.1475-4932.2011.00723.x Read More