Financial Review- The AFR view

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Table of Contents Introduction ................................................................................................................................................. 2 Main issues .............................................................................................................................................. 3 Economic concerns .................................................................................................................................. 3 Australian economy over the last three years ............................................................................................. 4 Reasons for the RBA’s move to cut the cash rate ........................................................................................ 6 Actions taken by the Reserve Bank of Australia ........................................................................................... 7 Side effects of actions .............................................................................................................................. 7 Conclusion ................................................................................................................................................... 8 References ................................................................................................................................................... 8

Introduction In this report, the financial review of economic aspects or variables of the Australian economy will be done. The main aim of this report is to analyze several economic variables of the Australian economy and provide the potential of it increasing shortly. In this report, firstly the issues associated with the Australian budget as well as the economy will be stated. Secondly, the national variables such as GDP, exchange rate, inflation rate, and cash rate in the last three years will be analyzed and discussed. Further, the reasons for the adopted monetary policy by RBA will be compiled in this report. In addition, the government’s role in enhancing demand will be part of this report. Main issues In the given article for this report, several issues were discussed. Following are the issue discussed in this article –  First, the issue discussed in this article is excessive public spending. Excessive public spending by the government leads to an increase in the inflation rate (AFR, 2022).  The second issue discussed in this article says that due to an increase in excessive public spending, the rise in cumulative federal deficit or rise in national debt. The rising deficit and national debt impact the economic stability of the country.  Third, the political parties making election promises to the public about building infrastructure projects, housing & other policies by an increase in using funds is another issue that led to the surging Australian economy and put the budget to the red ink line.  The article also discusses the non-creation of the new jobs or the failure of growing enterprises that have not been able to benefit the economy at first.  In addition, the issue discussed includes the complicated or complex taxation system in Australia. The increase in debt and government spending during the covid-19 pandemic to secure the health and safety of Australians and less income generation during this time has also been discussed in this article.

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Economic concerns Based on the economic outlook in 2022, there are some concerns associated with the Australian economy in 2022. There is a possibility of a rise in consumer inflation in Australia in 2022. More than a 6% inflation rate is forecasted for the next half of the year (Australian Bureau of Statistics, 2020). The rise in the inflation rate impacts economic stability, aggregate demand, and consumer savings. The increase in inflation rate & consumer commodity prices, and decrease in consumer savings are the economic concerns related to macroeconomic variables of the Australian economy. Another concern related to the Australian economy in 2022 is the decline in the household saving ratio. In this, the rising interest rates, increase in taxation rates, and increase in inflation rates are going to impact the household budget and lead to a decline in household savings. The decline in household savings can impact the economy. Another concern associated with the Australian economy in 2022 is the rise of covid-19 can lead to the government’s public spending which can further increase the prices of several goods or commodities in Australia. In addition, the GDP growth, as well as the unemployment rate, is among other main concerns associated with the economy in Australia (Munawar, et.al, 2021). The rise in consumer prices and interest rates can impact investment in Australia. Australian economy over the last three years In this section of the report, the four common national macro-economic variables such as GDP growth, inflation, exchange rate, and cash rate will be analyzed effectively. The data on Australian GDP growth, inflation, exchange rate, and cash rate over the last three years will be analyzed using the systematic approach and the economic situation in Australia based on these aspects will be stated. Following are these national macroeconomic variables – GDP growth – GDP is a gross domestic product that is the national macroeconomic variable that helps in measuring the value-added in the goods produced in a country. In Australia, the GDP growth rate measured in the last quarter of June 2019 was 0.7%. In comparison to it, the GDP growth was -6.8% in June 2020 (Australian Bureau of Statistics, 2022). In the Australian Dollars, the GDP amount was 499B $ in June 2019 and it was declined to 469.3B $ in June 2020. The huge decline in GDP growth in FY 2020 in comparison to FY 2020 shows the huge impact of the

covid-19 pandemic on the GDP growth of Australia. In FY 2021, the last quarter of June shows an increase in the GDP growth rate. In FY 2021, the GDP growth is 0.8% and it rises positively. GDP amount rises from 469.3B $ in June 2020 to 514.8B $ in June 2021. It shows a significant rise in the GDP growth rate in the last quarter of FY 2021 (Lim, et.al, 2021). Inflation rate – The inflation rate is one of the national macroeconomic variables that help any country to analyze or understand its economic condition. The inflation rate is the rate that measures the increase in the price of consumer goods over a certain period. The inflation rate in Australia in the last quarter that is June of FY 2019 was 0.6% in the consumer price index. In June 2020, the inflation rate fell to -1.9% due to the covid-19 pandemic or imposition of covid- 19 lockdown. The comparison of the inflation rate in June 2019 and June 2020 shows a significant change in the prices of consumer goods (Australian Bureau of Statistics, 2022). Due to covid-19, there was a significant fall in fuel prices as well as housing goods which led to a fall in the inflation rate in June 2020 in comparison to June 2019. In June 2021, the inflation rate rose to 0.8%. With the rise in outdoor activities and consumption of fuel and other goods increased which led to a rise in prices or inflation rate in June 2021 quarter. Exchange rate – The exchange rate is the rate at which the price of one currency is determined in the terms of another currency. It is an important national macroeconomic variable that provides information about the economic status of any country. In Australia, the average exchange rate of the Australian dollar to the US dollar in June 2019 was 0.695. In June 2020, the average exchange rate of the Australian dollar to the US dollar was 0.6896. And in June 2021, the average exchange rate of the Australian dollar in terms of the US dollar was 0.7637. Based on the respective average exchange rate in 2019 and 2020, it declines a bit or shows a stable economic condition (Exchange Rates, 2019). However, the rise in the average exchange rate from June 2020 to June 2021 shows the fluctuations in the economy. The rise in the exchange rate has impacted the importing cost as well as the aggregate demand in the economy. Cash rate – A cash rate is the rate charged by central banks from commercial banks for loans. Reserve bank of Australia uses a cash rate to charge the commercial banks for lending loans. In June 2019, the cash rate set by RBA was 1.25%. In June 2020, RBA sets the cash rate at an all-

time low and it is 0.30%. In June 2021, it was rise to 0.30%. It shows that the cash rate was reduced by RBA in 2020 by a big steep (Australian Bureau of Statistics, 2020). The decline in cash rate helps the commercial banks to take loans from RBA at a low-interest rate and improve their economic activity in the economy. However, to keep the stability in the economy and keep the prices & banks stimulating money in the economy, RBA keeps a check on the cash rate. The rise in the cash rate in 2021 June shows that RBA wants to control inflation. Reasons for the RBA’s move to cut the cash rate Interest rates and the amount of money that can be lent are two of the aggregate demand components that monetary policy affects. Increasing the interest rate and the loanable funds of the public would increase two components of aggregate demand if monetary policy was restrictive. As businesses spend less on capital projects, they should find that there is a greater incentive to invest in financial investments than actual capital projects with higher interest rates. Large goods, such as houses and vehicles, are difficult to finance at higher interest rates. The opposite of a monetary policy that is looser and expanded would be increased savings and direct loans for large-scale goods. This would result in lower interest rates and more lending. Money policy counteracts downturns and upturns in the economy, that is, it is countercyclical. When recession rises in addition to rising inflation, monetary policy must be relaxed. An overreaction risk comes with a countercyclical approach. Total demand can fall to the right of inflation if the loose monetary policy goes too far to end a recession. The left may be pushed to the brink of recession if monetary policy is made to limit inflation too strictly. Its official interest rates were cut to just 0.25% to protect the economy. About 4.5% of gross domestic product is provided by the RBA in the form of loans (Higginson, et al., COVID-19: The need for an Australian economic pandemic response plan, 2020). Airlines and travel companies are also negatively affected by this virus, which reduces their profits to an enormous extent. Although there is a range of factors contributing to a downward trend in economic activity, minor issues have contributed greatly to the ongoing recession. Small businesses rely on

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government loans because they cannot make enough money to produce a great deal of revenue. Fiscal policies based on Keynesian economic principles stimulate economic activity, thus stimulating private sector business operations. An economic stimulus refers to the use of government policy to stimulate the private sector's economy to respond by comparing it to the biological stimulation process. There is a tendency to stimulate the economy during recessions. Rates of interest, increasing government spending, and quantitative easing, to name a few, are some of the tools that are used to implement economic stimulus. An economic stimulus package boosts economic activity and helps the country recover from a crisis. A boost to the economy can be achieved by expanding monetary policy and expanding fiscal policy. Actions taken by the Reserve Bank of Australia Since the Australian dollar's exchange rate has been floated, the nation has been forced to develop monetary policies that are currently flexible enough to accommodate the changing course of the economy. A trade-weighted indexing method implemented and compared by the Reserve Bank of Australia (RBA) is an effective method of monitoring the price changes of commodities. To keep track of raid activities in Australia and their effect on exchange rates, these measures are closely monitored. Additionally, there is the option of setting a flexible exchange rate regime that targets low inflation rates as the main objective of monetary policy (Higginson, et al., 2020). A change in interest rates in the domestic market is necessary for the RBA to further increase exchange rates. It is also related to foreign interest in the business that exchange rates tend to fall when interest rates rise. The exchange rate for AUD may rise above the fixated level if the monetary policy is tightened more than is normal. In addition to lowering the currencies, quantitative easing can also enhance the value of the dollar by causing downward pressure on the currencies. Side effects of actions Price stability in Australia can be significantly affected by monetary and fiscal policy changes. By reducing wages, such tools can also maintain high employment rates. By implementing a

coordinated monetary policy across all industrial trade channels, the exchange rate of the AUD can also be stabilized on the foreign exchange market. A traditional approach to monetary policy regulation can, however, result in high liquidity levels in banks without significantly raising credit levels. The country must develop sufficiently robust banking systems simultaneously to ensure success in raising exchange rates. Conclusion In the end, it can be concluded that in this report different economic variables are analyzed in the context of the Australian economy. From the analysis of the article given for this report five main issues are identified which show that excessive public spending resulted in inflation and a rise in the national deficit. Moreover, major concerns of the Australian economy are also discussed which include an increase in the unemployment rate, the decline in household savings and the rise in inflation are the main concerns of the government. In addition, in-depth insights are also provided into the position of the Australian economy in the last three years. The GDP rate of the company has increased in the last quarter of the year 2021. The inflation rate is 0.8 % in the Australian economy in the year 2021. However, the exchange rate showed fluctuations that had impacted the importation cost of the economy. After that reasons are mentioned for which RBA needs to cut the cash rate and revive the economy and some actions are suggested like flexible monetary policies to RBA.

References AFR, 2022. " It’s time to start budget repair". [Online] Available at: https://www.afr.com/policy/economy/it-s-time-to-start-budget-repair-20220203- p59tlz Australian Bureau of Statistics, 2022. " Australian National Accounts: National Income, Expenditure and Product." [Online] Available at: https://www.abs.gov.au/statistics/economy/national-accounts/australian-national- accounts-national-income-expenditure-and-product/latest-release Australian Bureau of Statistics, 2020. " Consumer Price Index, Australia". [Online] Available at: https://www.abs.gov.au/statistics/economy/price-indexes-and-inflation/consumer- price-index-australia/jun-2020 Australian Bureau of Statistics, 2020. " Consumer Price Index, Australia". [Online] Available at: https://www.abs.gov.au/statistics/economy/price-indexes-and-inflation/consumer- price-index-australia/jun-2020 Exchange Rates, 2019. " Australian Dollar to US Dollar Spot Exchange Rates for 2019". [Online] Available at: https://www.exchangerates.org.uk/AUD-USD-spot-exchange-rates-history- 2019.html#:~:text=This%20is%20the%20Australian%20Dollar,USD%20on%2025%20Aug %202019 Higginson, S. et al., 2020. COVID-19: "The need for an Australian economic pandemic response plan". Health Policy Technology, vol. 9, no.4, p. 488–502. Higginson, S. et al., 2020. COVID-19: "The need for an Australian economic pandemic response plan." Health Policy Technology, no. 9, p. 488–502. Lim, G. et al., 2021. "The Australian Economy in 2020–21: The COVID 19 Pandemic and ‐ Prospects for Economic Recovery." Australian Economic Review, vol. 54, no. 1, p. 5–18.

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Munawar, H. S. et al., 2021. "Effects of COVID-19 on the Australian Economy: Insights into the Mobility and Unemployment Rates in Education and Tourism Sectors." Sustainability, vol. 13, no.20.

Financial Review- The AFR view

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