Question

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Background information: Evaluate the International Macroeconomic context of Australia's 2020 economic performance – current policy challenges and likely future directions. Is Australia well positioned to recover in 2021?

Question: In 500 words describe Australias macroeconomic policy options put in place over the year – likely outcomes / limitations and illustrating the IS-LM-BP in relation to this.

Answer 1

The Australian economy is expected to record a contraction in GDP of around 10 per cent over the first half of 2020; total hours worked are expected to decline by around 20 per cent and the unemployment rate is forecast to rise to around 10 per cent in the June quarter.Australia is about to enter a recession, according to 87% of economists in the latest Finder survey. Economic consultancy firm Capital Economics says the prospect now looks “very likely”, with restrictions on travel and gatherings expected to push GDP growth for the first half of the year into negative territory.

The pandemic hit the economy hard in Q2, causing GDP to contract at the sharpest pace on record and sending the country into its first technical recession in nearly 30 years. Nosediving household spending and shrinking fixed investment amid job losses, business shutdowns and elevated economic uncertainty over possible flare-ups of the virus were behind the dire reading. More positively, the external sector supported the economy, although this was due to freefalling imports. Moving to Q3, early data shows tentative signs of a recovery: Retail sales increased at a healthy pace in July which, together with somewhat less downbeat consumer confidence, suggests recovering household spending. However, on the production side, business sentiment—albeit higher than in Q2—remained sour in July-August, while exports plunged in July, calling for caution over the pace of a recovery ahead.

Australia Economic Growth

GDP is set to contract notably this year, as both domestic and external demand are battered by the pandemic and associated restrictions. That said, expansionary fiscal and monetary measures should cushion the fallout and help a healthy recovery into 2021. Flare-ups of the virus pose the main downside risk to the outlook. FocusEconomics panelists project GDP to contract 4.1% in 2020. In 2021, the economy is seen expanding 3.1%, which is unchanged from last month’s projection.

Australia Economy Data

	2015	2016	2017	2018	2019
Population (million)	24.0	24.4	24.8	25.2	25.6
GDP per capita (USD)	51,474	51,970	55,961	56,488	54,222
GDP (USD bn)	1,235	1,268	1,386	1,422	1,386
Economic Growth (GDP, annual variation in %)	2.3	2.8	2.5	2.8	1.8
Consumption (annual variation in %)	-	-	-	-	-
Investment (annual variation in %)	-4.0	-2.4	3.5	2.5	-2.2
Exports (G&S, annual variation in %)	6.5	6.9	3.4	5.1	3.2
Imports (G&S, annual variation in %)	2.0	0.1	7.8	4.1	-1.2
Industrial Production (annual variation in %)	1.7	2.0	1.2	3.8	2.4
Retail Sales (annual variation in %)	4.5	3.7	2.4	3.0	2.7
Unemployment Rate	6.1	5.7	5.6	5.3	5.2
Fiscal Balance (% of GDP)	-2.3	-2.4	-1.9	-0.5	0.0
Public Debt (% of GDP)	37.7	40.5	41.1	41.5	45.0
Money (annual variation in %)	13.7	8.2	8.9	2.3	22.1
Inflation Rate (CPI, annual variation in %, eop)	1.7	1.5	1.9	1.8	1.8
Inflation Rate (CPI, annual variation in %)	1.5	1.3	1.9	1.9	1.6
Inflation (PPI, annual variation in %)	1.4	0.9	1.6	1.8	1.8
Policy Interest Rate (%)	2.00	1.50	1.50	1.50	0.75
Stock Market (annual variation in %)	-0.8	7.0	7.8	-7.4	19.1
Exchange Rate (vs USD)	0.73	0.72	0.78	0.71	0.70
Exchange Rate (vs USD, aop)	0.75	0.74	0.77	0.75	0.70
Current Account (% of GDP)	-4.7	-3.3	-2.6	-2.0	0.6
Current Account Balance (USD bn)	-58.2	-41.4	-35.4	-28.5	7.8
Trade Balance (USD billion) Is Australia well positioned to recover in 2021?	-13.1	3.1	10.0	30.3 If the forecast is accurate, Australia's economy should weather the pandemic comparatively well. The WEO estimates that Australia's economic growth will rebound sharply with 4 per cent growth in 2021. This would leave the Australian economy broadly flat over the 2020–21 period.