Term Paper on "Macroeconomic and International Trade Analysis of Australia"

Term Paper 8 pages (2139 words) Sources: 7 Style: MLA

[EXCERPT] . . . .

Macroeconomic and international trade analysis of AUSTRALIA

Global economy is experienced a significant growth and development period. However, this economic development is experienced differently from one region to another, as not all countries manifest the same degree of economic development. Some countries, like the United States, have reported economic growth at a slower pace. China's economic development determined certain areas of Australia's economy to develop as well, given the fact that these two countries have intense commercial relationships. Also, the global economic development influenced the economic expansion of Australia. This fact is proven by the current position strengthening of the Australian dollar.

Macroeconomic Outlook on Australia

Currently, Australia's economy follows the Western capitalist style. The most important factors that positively influence the Australian economy rely on developed business and consumer confidence, and quite high export prices for raw materials and agricultural products. In addition to this, the country's economy also relies on implementing a series of reforms, maintaining low inflation level, and developing relationships with China. This combination of diverse factors has determined Australia's economy to become stronger and more reliable.

Another macroeconomic trend for the Australian economy is related to trade deficit that has increased in recent years, because of drought and strong import demand. However, the trade balance improved in 2006, which means that export improved also. In 2005, Australia reached the peak in housing prices, which determined interest rates not to be raised, and therefore, speculations in the field were prevented. Since 2002, the country's budget registered surplus, due to implementing conservative fiscal policies (CIA, 2007).

In order to provide a clearer image on Australia's macroeconomic situation, the following lines will focus on a series of facts regarding the country's economic performance: GDP (purchasing power parity) - $674.6 billion; GDP (official exchange rate) - $644.7 billion; GDP (real growth rate) - 2.7%; GDP per capita - $33,300; GDP composition by sector - agriculture: 3.7%, industry: 26.2%, services: 70.1%; labor force - 10.74 million; labor force by occupation - agriculture: 3.6%, industry: 21.2%, services: 75.1%; unemployment rate - 4.9%; household income or consumption by percentage share - lowest 10%: 2%, highest 10%: 25.4%; inflation rate - 26.7% of GDP; budget - revenues: $268.2 billion, expenditures: $257.3 billion; public debt: 16.1% of GDP (CIA, 2007).

The country's agriculture provides the following products: wheat, barley, sugarcane, fruits, cattle, sheep, poultry. Australia's industry is based on the following sectors: mining, industrial and transportation equipment, food processing, chemicals, steel. The industrial production growth rate reached -3.5%.

The country's electricity situation is the following: electricity production - 236.7 billion kWh; electricity consumption - 219.8 billion kWh; electricity exports - 0 kWh; electricity imports - 0 kWh.

The country's oil situation is the following: oil production - 530,000 bbl/day; oil consumption - 877,300 bbl/day; oil exports - 333,200 bbl/day; oil imports - 611,400 bbl/day; oil proved reserves - 1.491 billion bbl.

Australia's natural gas situation is the following: natural gas production - 38.62 billion cu m; natural gas consumption - 25.72 billion cu m; natural gas exports - 12.9 billion cu m; natural gas imports - 0 cu m; natural gas proved reserves - 750.6 billion cu m.

Australia's exports partners are: Japan 19.6%, China 12.3%, South Korea 7.5%, United States 6.2%, India 5.5%, New Zealand 5.5%, United Kingdom 5%. The most exported commodities are: coal, gold, meat, wool, alumina, iron ore, wheat, machinery and transport equipment. The country's exports reached $124.8 billion in 2006.

Australia's imports partners are: China 14.4%, United States 14.1%, Japan 9.6%, Singapore 6%, Germany 5.1%. The most imported commodities are: machinery and transport equipment, computers and office machines, telecommunication equipment and parts, crude oil and petroleum products. The country's imports reached $134.5 billion in 2006.

Other economic and financial facts about Australia include: current account balance - -$41.14 billion; reserves of foreign exchange and gold - $55.08 billion; external debt - $628.1 billion; stock of direct foreign investment at home - $246.2 billion; stock of foreign direct investment abroad - $226.8 billion; market value of publicly traded shares - $804.1 billion; exchange rates - Australian dollars per U.S. dollar: 1.3285 in 2006, 1.3095 in 2005, 1.3598 in 2004, 1.5419 in 2003, 1.8406 in 2002.

Currency Outlook on Australia

The Australian dollar has reported quite a turmoil evolution. In 2007, the months of July and August brought significant decreases for the Australian dollar. Soon after this period, the Australian dollar managed to make a successful comeback, in spite of the U.S. dollar. The reason for how the situation evolved is the fact that the impact of the global financial turmoil was quite minimal on Australia and New Zealand. Specialists expected significant negative impact on these regions, but their forecasts did not come true (Calleya, 2007).

The effects of the global financial turmoil were not as significant as expected on Australia due to a series of factors that counteracted these effects. One of these factors is the fact that the country has a large current account deficit, backed up by very large external liabilities. This situation determined Australian market conditions to calm down, determining investors to borrow with lower interest rates and to invest these funds in the domestic market. As a consequence, the Australian dollar's performance exceeded all other currencies' performance.

Another factor responsible for the situation described above is related to the reduced number of subprime loans present in the economy. The Reserve Bank of Australia has reported that Australia's continuous economic growth is due to these loans that represent approximately 1% of the total stock of mortgages. This situation has positive effects on the Australian dollar. As a consequence, it is expected that interest rates will not increase in the future period.

Another issue that affects the currency situation is the fact that Australia has experienced dislocation in its money markets. In case this dislocation continues to produce, it is expected that the Australian dollar will experience vulnerable periods. However, there other situations that threat to affect the Australian dollar in a negative manner. For example, if the international community retrenches and the overseas funding the Australian dollar relies on diminishes. It is expected that this possible scenario will be counteracted by Australia's equity market that is continuously increasing.

Australia's Financial Situation

The latest trends that characterize Australia's financial situation refer to high levels of profitability and strong capital positions reported by the country's financial institutions. The banking sector is characterized by constant non-performing loans that are kept under control at low levels and by balance sheets expanding over the past year due to business credit growth (Reserve Bank of Australia, 2007). These increased profitability levels were determined by restraint in costs and solid growth in income from funds management activities. As a consequence of the economic strengthening currently experienced by Australia, the average credit rating of banks and insurance companies has significantly improved.

Australia's Economy Trends in the Global Economy Context

The most recent reports revealed a 5% global GDP growth in 2007. Although this value is slightly lower than the 2006 value, this was the fastest growth for over thirty years. However, economic evolution varies from one region to another. Europe's economic activity has experienced accelerated growth, determining highest outcomes since the decade started (Stevens, 2007). This economic development was mostly due to Germany's outstanding economic performance. Another region that reported significant economic growth is Asia, due to China's economic activity that is constantly developing. On the other side, one of the regions that experienced economic slowdown is the United States. In relation to China's economic development, it is expected that parts of Australia's economy that are complementary to China's growth needs will develop in the future period of time.

The table bellow presents the economic growth comparison between Australia and world's most important economies:

Economic growth comparison

Country

Annual average

Australia

Canada

China

France

Germany

Indonesia

Italy

Japan

Korea (South)

New Zealand

Singapore

United Kingdom

United States

OECD average

G7 average

EU average

Source: Parliament of Australia.

The development of the global economy determined Australia's economy to expand as well. One of the areas affected by this development is resource prices, which increased, leading to the country's trade increase of approximately 40% over the past four years. This was the highest level attained by the Australian trade since the 1950s.

Although Australia has experienced certain issues that affected the economy's state, like drought, the real national income increased up to 8%. Inflation's evolution over the past few years was the following: 2.4% in 2003, 2.6% in 2004, 2.8% in 2005, and almost 4% in 2006. It seems that "the most recent data for inflation, however, showed a more welcome trend, with underlying measures of inflation running at a reduced pace and the CPI rate on its way down as well" (Stevens, 2007).

The following table presents most recent results and forecasts for Australia's demand, output, and prices:

Demand, output, and prices

Indicator

Current prices

Percentage changes, volume

Private consumption

Government consumption

Gross fixed capital formation

Final domestic demand

Stock building

Total domestic demand

Exports

Imports… READ MORE

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