Australian interest rates stay at record low

As expected the Reserve Bank of Australia (RBA) kept interest rates on hold at their meeting yesterday. They remain at the record low of 1.5%.

The RBA forecast that the Australian economy would continue to grow at about 3% in 2017, but that inflation remains below target. Therefore the RBA wishes to encourage the economy to grow faster by keeping it cheap to borrow and so encouraging consumer spending and investment, both components of Aggregate Demand.

Australian interest rates may stay the same for a while. The pressure to raise them might come from higher growth and a rapidly rising housing market. However the pressure to put them down will come from a rising exchange rate (based on events in the USA where interest rates will rise).

Monetary policy is a very important tool in managing the economy and works by affecting the total level of demand in the economy.

Australia's policy interest rate since 2014

Below are two links. The ABC one is for Year 12, the Channel Nine one for Year 11.

The ABC article is here

The Channel Nine article is here

VCE students must be able to explain policy decisions and economic events in Australia over the previous two years prior to their examination. Interest rate decisions (monetary policy) is one of the areas they must be familiar with and be able to explain why policy decisions (change interest rates etc) we made.

IB students can use this as an example of monetary policy too.

Australia is not 'half way' to recession.

Yesterday it was revealed that in the September quarter the Australian economy shrank by 0.5%. Some commentators chose to say that Australia was 'half way to recession' on the basis of the semi-technical definition that a recession is two quarters of declining real GDP.

The fact that Australian GDP has fallen is remarkable and looking at the reasons for this is a very important exercise. There are many articles on the fall in. output that might make useful Macro IA's for the IB students.

The article below is from the Guardian Australia and as always has lots of data and opinion. The opinion makes it unsuitable for an IA article itself, but it can help you write a commentary.

What could be the causes of the fall in real GDP?
Falling AD?
AS not growing fast enough?

Certianly plenty to apply in this story to the AD/AS model.

The Guardian article is here

See above - this is classic IA topic stuff. Causes, consequences and policy implications galore. For VCE students an absolute must to read as well.

Unemployment and Monetary Policy

The Australian unemployment rate has fallen to 5.7%. This is the lowest rate for two and a half years and so people are generally pleased.

5% remains the 'full employment' target rate, but at least things are going in the right direction. The end of the mining investment boom meant many economists feared 7% unemployment would become a reality, a level not seen in Australia for a considerable period.

Why has Australia done so well? There are a few factors we can identify.

1. Accommodating monetary policy
2. A lower exchange rate
3. A Federal Budget deficit.

The Reserve Bank of Australia (RBA) has reduced interest rates to 2%, the lowest ever, and this has helped boost consumer and investment spending, both components of Aggregate Demand, by making it cheaper to borrow while also reducing the interest on existing loans.

The exchange rate has fallen significantly since 2013, making the non-mining sector more competitive overseas, and so boosting exports.

The government, despite the desire to return the Budget to surplus, has maintained a substantial deficit, so helping maintain Aggregate Demand.

As the article below points out the lower unemployment rate and slower growth in house prices, along with low inflation, means the RBA could cut interest further to encourage a depreciation in the AU$ which has strengthened recently and threatened Australia's export competitiveness.

The Sydney Morning Herald covers the story here

Australian unemployment falls to 5.8%

Unemployment in Australia, which had seemed to be heading well above the full employment level has shown encouraging signs over the last few months. It has now fallen from a peak of 6.4% last year to 5.8%.

The rise in unemployment was expected due to the ending of the mining investment boom, and the recovery is attributed to the expansionary monetary policy and the depreciation of the dollar.

VCE students need to know how all of the key economic indicators have moved over the previous four years (from 2013 for the current Year 12's). In particular VCE students should know the demand and supply side factors which have influenced each variable and the policy responses (budgetary, monetary and supply-side) these have prompted.

Below is an article from The Guardian which analyses recent trends. It also examines what full employment might mean and whether it is worth pursuing as an economic policy goal.

The Guardian article is here

While this post focuses on Australian Unemployment and the needs of tackling VCE it is also useful for IB students. Consider the impact of different factors of unemployment and how economies are interdependent.

Growth in Australian economy 'not that bad'

Everyone knows that the mining boom is over. The non-mining sector is doing its best to save the economy from recession, but who actually gave it much hope?

Recent figures show that the Australian economy is growing much faster than we thought and 3% for 2015 isn't unreasonable. Of course this is at the lower end of Australia's growth target, but given the collapse of commodity prices and the decline in mining investment it is a nice surprise.

The Guardian have provided another excellent survey of economic data in the article linked below.

Notice that net exports are now a significant contributor to Australian growth. This is not from mining, but the non-mining sector. The depreciation of the Australian dollar has helped competitiveness and we are now seeing the 'J-curve' effect and confirmation that the Marshall-Lerner conditions apply.

Of course consumer spending (the largest contributor to GDP) and housing continue to be important. Should consumer sentiment drop there is still a danger of recession.

A good look through the data is advisable to all students, and you can play with the interactive graphs.

The Guardian article is here

This article is essential reading for VCE Economics students. Understanding the influences on the Australian economy over the last four years (demand and supply side) is critical. For IB this article shows how a depreciation in the exchange rate has worked through to higher net exports as well as providing important examples for both Paper 1 and 2.

Influences on the Australian Budget

The role of economic forecasts are crucial in setting a government Budget. As the Treasurer Scott Morrison approaches his first Budget he must consider what is likely to happen in the economy.

This is important because government revenue and spending are affected by the level of economic activity. When growth is slowing, or worse GDP declines, government revenues are lower than expected and government expenditure is higher. This has been the story in Australia since 2011.

The present government, and to an extent the last one, have an irrational (from an economists perspective) desire to achieve a Budget surplus. It would appear that they wish to cut spending to achieve this. However that is the exact opposite of what a government should do when growth is slowing and there is the threat of a recession.

The Committee for Economic Development of Australia (CEDA) have issued a report on the trends in the Australian economy. It makes gloomy reading for Morrison. There will be no strong growth in tax receipts and it would appear there is a good deal more structural unemployment to come.

Worst of all for the Treasurer there is a great deal of uncertainty over currency and commodity markets. Australia depends on commodity exports and the exchange rate will determine the value of those exports. It is likely that once again the Budget figures released in May will be substantially revised during the year.

The Age covers the CEDA report here

This article is especially important to VCE Economics students who must have a firm understanding of events and influences on the Australian economy over the last four years. For both IB and VCE students the importance of forecasting to Budgetary/Fiscal policy is relevant as in the influence of the budget on the real economy.

Australian inflation, good or bad news?

The latest inflation figures put Australian inflation at 1.7%. That's higher than economists predicted, but still quite low (the RBA target is 2 - 3%, on average, over the business cycle).

All VCE students need to be aware of the main economic data over the last four years and so it is important to follow the trends in inflation as well as unemployment, growth, the current account and government finances.

The ABC report the latest inflation figures in the article below. It notes that 'core' or 'underlying' inflation is at 2%. It is headline inflation which is at 1.7%. However like many people the ABC ignores the actual RBA target which is 2 -3% on average. It is quite possible that inflation is on target as this is a period of subdued growth during the 'downswing' of the business cycle.

Two things to note from the article.
1. Subdued growth and inflation around where you might expect in this stage of the business cycle means that interest rates are unlikely to move from their record low of 2%. There is no need to stimulate Aggregate Demand (AD), as inflation edging up suggests that AD is reasonably healthy. If it wasn't falling oil and communication prices would have caused the expected lower inflation rate.

2. Inflation can be caused by 'Demand pull' factors or 'Cost push' pressures. However it is measured by aggregating price changes over a range of different sectors. The article shows how some sectors of the economy have seen price rises, others price falls. The 'inflation' figure of 1.7% is a weighted average of the various actual price changes.

Look carefully at the data. Be prepared to follow changes in inflation and what causes it for the rest of the course.

The ABC report Australia's inflation figures here

 

Australia's core inflation rate since January 2013 

This article has direct relevance to the VCE course. However inflation is a key macroeconomic indicator which is controlled through monetary policy and so also part of the IB course.

RBA less optimisitc on economy

The Quarterly Statement of the RBA has painted a gloomy picture of the economy. Unemployment is forecast to stay high for two years and the rate of growth will be just below trend. Inflation is forecast to be just 2% rather than the 2.75% previously predicted, mainly due to the repeal of the Carbon Tax.

Note that the repeal of the carbon tax does not reduce core (underlying) inflation, only headline inflation as it won't be repeated and will drop out of the index after a year.

The overall implication is that interest rates won't be rising any time soon and this might help bring the exchange rate down. Such a downward movement will be welcomes to exporters.

The Guardian article outlines the main points and contains essential figures to remember!

The Guardian article is here

The RBA Quarterly Statement on Monetary Policy is here

Unemployment up, but not all bad news

Unemployment rose last month, and has now reached 6%. This might seem a bad thing, but there were actually more full time jobs last month and the rise in employment exceeded expectations.

The reason for the rise in unemployment is due to a higher participation rate. This is encouraging because it means more people are seeking work and that indicates a degree of confidence in the economy.

The ABC article says it all. In particular look at the State unemployment data at the bottom of the article.

The ABC report the data here

Unemployment steady but the figure hides weakness

The latest unemployment figure shows that Australian unemployment stayed at 5.8% for a third month.

This can be seen as good and bad news depending on how you look at it. 

The Fat Controller claimed the government had turned the economy around because unemployment was forecast to be 6.25% by now.(This seems unlikely in the timescale.)

Others see a problem. The continued fall in the participation rate means that there could be disguised unemployment. "If the participation rate had remained at its 2011 average level the unemployment rate would now be seven per cent,"

One explanation for the fall in the participation rate is the aging population. However the fall in this rate seems to be too rapid for that to be the only reason.

The economy is growing, but not creating many jobs. This is not unknown when an economy is recovering as those employed take up the slack. Hopefully this means that jobs will start to come soon.

The Guardian covers the figures here

 

Economic news

There are several pieces of news to follow. 

The RBA kept interest rates on hold at 2.5% on Tuesday. The RBA commented that the exchange rate remained high by historical standards implying they thought it would fall.

Consumer confidence moved up, just a little, but is still at 1990 recession levels.

The ABS reported that GDP rose 1.1% in the first three months of the year, and annual growth was at 3.5%. This is higher than expected but the government still expect the rate of growth this year to be 2.5% which suggests a torrid nine months ahead.

The Fair Work Commission has agreed a 3% rise in the minimum wage. This will add $18.70 to the weekly wage of a full-time worker.

Below are two articles that cover some of these items. Please read them for details.

Note that the rise in the minimum wage is a supply side factor and will influence the Aggregate Supply curve by moving it to the left. Also take careful not of the Fair Work Commission's view on equity in terms of income distribution in Australia.

The BBC discuss Australian growth here

The Guardian looks at the minimum wage change here

Dive, dive, dive!

The Federal Budget has, as expected, had an affect on Consumer Confidence (sentiment). However the hit is far greater than was anticipated.

One measure has consumer confidence declining by 14% in the latest four week period. 

The Westpac-Melbourne Institute measure of Consumer Confidence also fell. Westpac's Chief Economist, Bill Evans, commented, "The sharp fall in the Index is clearly indicating an unfavourable response to the recent Federal Budget. This puts the Index at its lowest level since August 2011, before the Reserve Bank began its recent rate cut cycle."

The diagram shows the Westpac-Melbourne Institute data, issued today. 

This is important because as Consumers Expenditure is the largest component of Aggregate Demand this is likely to affect the real economy. When confidence falls households reduce spending (raise saving) and this knocks on to the real economy as the AD curve shifts to the left.

This is an early indication of confidence and it will probably rebound when people get over the shock of the Budget. However the overall effect will still be to depress AD for the rest of the year with the inevitable consequences for output and employment and, of course, business confidence.

The Sydney Morning Herald reports the ANZ figures here

Westpac's comments on the data here

Unemployment steady, but what next?

In a surprise set of figures Australia's unemployment rate remained at 5.8%. Many expected a rise after last months surprise fall.

There were over 14,000 new jobs created and unemployment actually fell a little (by 400). However the participation rate fell again and this indicates that more people 'left' the workforce as they stopped looking for work.

The table below is from the ABS.

When looking at the figures concentrate on trends. These are over the last year, rising employment, steady/falling unemployment and a falling participation rate. These can be seen in the last column.

The question of where unemployment goes next is a big one. The two articles below, both from the Sydney Morning Herald, take opposite lines. One says unemployment may have peaked, the other that the next two years will see much higher unemployment.

ust

Look at the factors each article considers is driving employment. this is a classic 'headwinds' and 'tailwinds' situation. Some factors are pushing the economy one way and some the other. You must be aware of these different factors.

Unemployment peaked? - SMH here

Tidal wave on unemployment coming - SMH here

Youth unemployment. Something to be worried about

A charity has highlighted the rise in youth unemployment in Tasmania as a grave cause for concern, and they are right in this. However youth unemployment in Australia generally is on the rise and we should not be too surprised. 

Below is the Australian unemployment rate and youth unemployment rate.

Notice the similar trends, but youth unemployment is around twice the national average. In Tasmania the youth unemployment rate is up to 20% in some areas.

The phenomenon of higher youth unemployment is one seen world wide. Newly qualified school and university leavers are at a huge disadvantage when unemployment is rising. Firstly they have no experience and so require expensive training, which makes them unattractive to employers. Secondly, and more importantly, when there is a downturn or slowdown in the economy firms reduce their recruitment activity, and the young are the very people who would fill those vacancies if they exist.

What tends to happen is that a year group or two miss out and a large proportion can't find work. When there is an improvement in the economy the people hired are the recent school leavers and graduates as those who have not worked for a year or two are treated with suspicion

by employers. "If they have not worked there must be a reason."

The result is that short turn youth unemployment can turn into long term unemployment for some. This is a significant and harmful cost of unemployment.

Having said this things are not as bad in Australia as they are elsewhere. British, US and Greek youth unemployment figures are shown below.

The ABC covers the story here

Unemployment figures good and bad news

Apologies this post got stuck in drafts!

The latest employment figures show both unemployment and employment up. This seems strange.

The number of employed people rose 47,300 with full time employment up by 80,500 (there was a fall in part time employment which accounts for the difference).

This is really good news. Expectations was for around 10,000 new jobs, so this is well ahead of expectations. Although there has been good news recently, such as the retail sales data and trade balance, unemployment is usually a 'lagging indicator'. This means that when there is an upturn in the economy it is usually months before employment rises and it takes a while for unemployment to rise in a downturn.

However unemployment also rose by 9,800, and stands at 6% of the workforce. How can that come about?

The reason that both employment and unemployment rose is that the workforce itself increased. This often happens in Australia due to the relatively high net migration. 

There was also a rise in the participation rate by 0.2% to 64.8%. The participation rate tends to fall when people become discouraged from looking from work and so give up their search. When people are optimistic the participation rate rises as people are encouraged by the success of others to find work. Overall the rise in the participation rate is another good sign.

 

More good news!

Following on the growth figures it appears Australia is doing even better than thought.

Retail sales are growing strongly. This is more than good news for retailers and those who make the goods and services they sell. It suggests that Consumer Sentiment (consumer confidence) is very strong and this is good news for the national economy.

Households don't raise their spending when they are uncertain. When they are confident they spend and are prepared to borrow. This can lead to higher total (aggregate) consumption an important part of Aggregate Demand. Rising Aggregate Demand leads to higher growth and national income.

There is also news of a bigger than expected trade surplus - the amount that exports exceed imports. That means Australian firms are doing well in selling to overseas customers. Selling more means more jobs in Australia and that will help moderate the expected rise in unemployment.

Of course net exports (exports - imports) is also a part of Aggregate Demand. A larger trade surplus leads to a faster rise in AD and so faster growth.

Overall then the signs are that the slow down in growth caused by the winding down of the mining boom may be coming to an end. However the 'headwinds' causing the economy to slow remain strong, but the 'tailwinds' that speed the economy along seem to be getting a little stronger.

,

Australian Retail Sales - year on year change 2010 to present

Australia's Balance of Trade (Exports less Imports) 2011 to present

The BBC report the figures here

Good economic news?

Yesterday the reserve bank of Australia left interest rates at 2.5%, a record low for Australia. there was also news that Australia grew by 0.8% last quarter (3 months), faster than was expected.

The RBA feel that export growth will continue, but wish to remain accommodating as the rest of the economy grew only slowly. Interesting despite low interest rates borrowing is not growing strongly and this may indicate weak confidence among firms and consumers.

There is little doubt that unemployment will continue to rise, probably for the rest of the year, but the lower dollar is helping exports (as a lower exchange rate causes export prices to fall). The RBA would, however, still like to see the dollar even weaker (perhaps as low as 80c to the USdollar.

Below are articles on the rate decision and the growth figures.

The Australian reports the interest rate decision here

The ABC reports the growth figures here

Wages rise more slowly

The last time that wages rose as slowly as they did last year was 1997. Should we be surprised by this?

The previous post talked about unemployment being at a ten year high, and this should give us a clue to the wages data. When unemployment is high employers are under less pressure to grant wage rises because people might prefer to keep their jobs than force the issue and find themselves unemployed.

A.W. Phillips first identified this wage rise/unemployment link in 1960, using data from nearly one hundred years. There was a clear trade off between unemployment and wage rises.

 

The diagram shows the data up to 1913, the data from 1919 to  1957 looked identical. 

The link between wage rises and inflation was soon established and often the Phillips Curve is shown as a relationship between inflation and unemployment (a point not made by Phillips himself). So one good piece of news is that Australian inflation might be expected to moderate in the next six months. However the price is higher unemployment and some will feel that inflation is the lesser of two evils.

The article also suggests that Australians are going to experience lower incomes as wages rise less quickly than inflation. This is probably inevitable as the Australian dollar falls in value causing imports to be more expensive. Also it is part of the essential readjustment of wages to allow Australia to be competitive in the world market.

The ABC cover the issue here

Important reading for Year 12, and a useful start for Year 11 students

Understanding the issues that are affecting the economy is something all students must understand before the exams come around. This understanding is acquired slowly and built up over the course.

An essential source of unbiased information on how the Australian economy is doing is the RBA's Statement on Monetary Policy. This is issued every three months.

The statement gives a summary of what has been influencing the economy and provides forecasts on key variables such as inflation, growth and unemployment. The latest statement was issued on Friday.

In summary the statement says that growth is likely to be a little higher than was previously expected, inflation will be at the top end of the target range (2 to 3%) until the end of the year and that exporters are benefiting from the lower Aus$.

The Age article gives an excellent summary of the statement and is linked below. I have also linked to the RBA website page with the full statement. At this stage of the course working through the full statement after reading the Age's summary and get a feel for the issues and trends. You will then be able to build on this over the year (or two if you are in Year 11).

The Age article is here

The RBA statement is here

No change in interest rates, but a change in attitude?

As expected the Reserve Bank of Australia (RBA) left the cash rate at 2.5%.

Since 2011 the RBA have been steadily reducing interest rates (from 4.75% to the current 2.5%) because they saw that the Australian economy was not growing as fast as it had been. The RBA  was therefore able to try and stimulate the economy (try and get it to grow faster) while inflationary pressures were subdued.

In announcing this decision the RBA made one important point, and signalled another by what they did not say.

The RBA suggested that the current rate is likely to remain the same for some months. A 'period of stability' was foreseen, which means rates staying where they are. This is probably because they feel at 2.5% they are providing enough stimulus to the economy.

The thing they didn't say was that the exchange rate of the Australian $ is too high and should fall. They had been saying this consistently for over a year and absence of this comment suggests they think the Aus$ has fallen far enough.

The exchange rate affects the price of imports and exports. When the exchange rate falls it means the price of Australian exports falls abroad, leading to higher sales volume. However the price of imports rises and this will put upward pressure on inflation.

The graph shows how the exchange rate against the US$ since 2011.

 The Sydney Morning Herald reports the RBA decision here

Question

Why does the interest rate affect the exchange rate?