The report is segmented into two parts. The first section presents country analysis of Australia which offers the reader a clear picture of the country’s Macro-economic qualities and various data that shape the economy and the country. Through the country analysis, sufficient information is provided to help the reader carry on with the second section of the project. The second section covers investment analysis. In this section, the various investment opportunities and the restrictions as well as risks for any international investor seeking capital gains in Australia.
Balance of Payments-Current Account Surplus of Deficit (all values in US millions):
Through balance of payments, one gets an overview of record of international transactions that a country has had within a defined time period. In most cases, the balance of payments is presented in form of double-entry bookkeeping (Figure 1). In this case, transactions are recorded as credits or debits. The primary three accounts of Balance of Payment is current account, financial account and settlement account. In the current account, some of the items contained include international trade, net unilateral transfers, and the net income receipts from abroad. In case the imports are so much that they outweigh the exports, the country will be operating in a deficit. In the instance that exports outweigh imports then the country will be known to have trade surplus.
Figure 1: Key Figure for September 2017
Figure 2: Current Account Balance
Retrieved from http://www.abs.gov.au/ausstats/abs@.nsf/mf/5302.0
As at the quarter of September 2017, the current account deficit that is seasonally adjusted fell to $9,125 m by a margin of $539m.
Also, there was a fall of $376 m on the balance on goods and services hence leading to a surplus of $3,056 m in the September quarter 2017. Additionally, the main income deficit reduced to $11,968 million by a margin of $1,044 million.
In regards to the seasonally adjusted chain volume terms, the deficit level on goods and services increased within the three months, from $9,592 million to $9,737 million from June to September 2017. Even though this difference was noticed, no so much contribution is expected in terms of growth to the GDP.
In March 2017 quarter, the deficit of Australia’s current account shrank to A $3.1 billion, representing 0.7 per cent of the GDP. This is notably, the smallest since the float of the Australian dollar as shown in Figure 3.
Even though Australia is known to have high savings rates as defined by the developed country parameters, the investment rates normally remain higher hence the country only runs a sizable current account deficits (Figure 4). The last time Australia had a quarterly surplus was in June 1975. From that time, Australia has had a “structural” current account deficit economy that mainly relies so much on foreign capital.
Retrieved from https://www.austrade.gov.au/news/economic-analysis/australias-shrinking-current-account-deficit
Figure 5: GDP Per Capita
The Australian economy remains one of the most resilient and sustainable by the different macroeconomic policies in place. For a record 26 years, Australia has progressively grown more than three per cent each year. The growth is also attributed to strong institutions and solid trade ties between the country and the Asia-Pacific region. Australia boasts of being the major developed economy that never recorded any annual recession since 1992 to 2016 (Figure 6). Even though the world as has witnessed end of global commodity super-cycle, the Australian community continue to do well.
In this economy, the rebalancing of economic activity from commodity investments to other activities remains high and is made possible through the different monetary and fiscal policies, currency. Nonetheless, Australia’s economy also faces the issue of global risk due to the known issue of a “low-growth trap”.
Just like the other OECD countries, the level of productivity in Australia has declined from its highest point in the 1990s, even though this remains within the mean performance in the long term as shown in Figure 2. Even though there has been better rate of production in the recent years and high population age which implies that the country’s rate of growth largely depends on strong productivity growth, there is high capacity needed to absorb and come up with innovations. Additionally, the rate of inclusivity has declined in Australia.
As shown by the Gini coefficient, there has been several changes and the households that are within the upper income brackets have benefited unequally from the economic growth in Australia. The real income for the households within the upper quintile grew by about 40% from the duration that spanned 2004 to 2014. However, the lower quantile witnessed a growth of about 25%. Due to the strong growths witnessed in the economy, the incomes of the households where there are wage earners have surged higher than that of the households that are reliant on transfers or even pensions that mainly make up the lower end of the income distribution. Additionally, the economic development that has been seen lately is attributed to strong skills that are desirable within the labor market. In fact, this has widened the wage distribution. This is a pointer as to why so much of the income continue to go to the very top of the income distribution. Moreover, the large socio-economic gaps that exist between Australia’s indigenous population and the other section of the population continue to be witnessed and this leaves a chance for reduction of any kind of gender imbalance.
From this, it can be clearly alluded that there is strong macroeconomic and financial sector institutions and policies that have been progressively supporting the economic growth and encouraging high living standards. It can be alluded that through easily maintaining long-run average productivity growth, the success of the growth is interfered with. However, through a renewed stress on structural reforms especially those that assist in boosting the capability of Australia to take up and generate innovation is necessary.
For Australia to have a sustained economic growth there is need to have an intensive call that stress on policies which ensure that there is equitable opportunities to engage in labor market through the skills acquisition and active labour market policies mainly the policies that help in addressing the concerns and at the same time ensuring productivity.
Exchange Rate in Australia
Over the past couple of years, the Australian dollar has traded in a fairly narrow range (Graph 2.23; Table 2.5). This followed a significant depreciation in nominal and real exchange rates from 2013 alongside a decline in Australia’s terms of trade (see ‘Box A: Australia’s Real Exchange Rate’). Recently, the Australian dollar has depreciated a little reflecting a fall in the price of iron ore. Volatility in the Australian dollar remains below average.
The real exchange rate of Australian dollar can mainly be linked to the massive increase in terms of trade which has presented so much benefits to the economy. There are a couple of variables that relate to the real exchange rate and they include productivity, inflation and perception of investors. The pressures have been managed through the floating of exchange rates, having sound fiscal policy, and prudent monetary policy.
In fact, in any open economy that boasts of a large share of exports that is driven by commodities, the terms of trade remain the most important factors that affect the real exchange rate. Indeed the just witnessed appreciation has mainly been due to the increase in trade and largely because the rise in prices of export goods. For instance, in 2005, there was a rise of 10 per cent in cooking coal and a rise of price by 70 per cent in iron core. Between the period covering 2001 and 2007, there was a rise in terms of trade by approximately 75%.
In the last 10 years, the Australian dollar (AUD) has risen in value so strong against the US dollar (USD), the rise has been from less than US $0.5 in the year 2001 to get to its peak of about $1.1 in 2011. Even though the continued rise can be linked to several factors, the boom within the mining industry is the main diver of the appreciation within the period of 2001-2011.
Notably, during the past years, the AUD has performed well above the post-float average for several years and has continuously been above parity against the USD from the year 2010. Notably, since the year 1983, when it was floated, the AUD reached parity for the first time in 2010.
Since the year 2002 to 2012, the AUD has witnessed a surging trend against the USD and TWI as shown in the chart below. This trend happened except for the time when there was global financial crisis (GFC), where it fell so much from June 2008 to November, 2008. Since the trough that was witnessed in June 2010, the AUD has progressively increased in value by approximately 21 per cent against the USD. On the other hand, the increase has been by approximately 14 per cent against TWI.
Chart: AUD against the USD and the TWI
The figures shown below represents the comparison of AUD exchange rates against some of the major currencies which include GBP, USD, SGD and JPY for more than 20 years.
Inflation in Australia
Over the time inflation has been perceived as a material illness that affects the livings standards of people. As defined by Hossain, (2014), inflation refers to the rise in general level of prices of goods and services in a specific period. Australia is one of the countries that have recently joined the inflation world. The primary goals of the Australian government, however, are to achieve the objective low inflation. This achievement in the country is defined by the Reserve Bank of Australasia
According to Australia Bureaus of Statistics, it is reported that in the third quarter of the year 2017, the consumer price of Australia rose to 0.6% from the previous quarter (Hossain, 2014) .This particular figure is below the country’s market expectations which are estimated at 0.8%. As explained by the Australia Bureau of statistics, the third quarter records were underpinned by the existence of higher prices in the market. Some of the commodities in the market that reported higher prices during the year include; tobacco. Electricity and holiday travel and accommodation. At the same time, the higher prices were partially offset by the existence of comedies that demonstrated a trend of low prices in the c countries. Some of these commodities include; telecommunications, vegetables, automotive fuels, services, and equipment.
In the second quarter of the year 2017, the inflation rate was 1.9%. This figure, however, falls in the third quarter to 1.8%. According to the Australia Bureau of Statistics, this figure tends to have undershot the market expectation of the country. In light of this, it moved further below the Reserve Bank which was reported at 2%- 3%. In general, the annual rage inflation edged down from 1.9% in the second quarter! 8% which was being recorded in the third quarter of the year 2017(Daley & Wood, 2015).
As reported by Daley & Wood (2015), it is significant to note that from the fourth quarter onwards, there will be new weights which will be introduced by the Australia Bureau of statistics. The new weight will be used in calculating the consumer price index of the country. The bureau proposes that a greater importance will be assigned certain expenditure in the country like the housing expenditure. Some of the possible vote heads that will be covered in the housing expenditure include rent and utilities. On the other hand, there will also be less importance assignment by the bureau. Some of the possible disciplines in the country that is likely to receive less assignment include either food or nonalcoholic beverages.
Over the last five years, the lowest inflation rate that has been recorded on an annual basis was another year, 2016. At 1.3%. According to Australia Bureau of Statistics, the other four years have recorded the following inflation
Year 2012 2013 2014 2015 2016
The inflation rate ( This is the CPI annual variation in percentage) 1.8% 2.5% 2.5% 1.5% 1.3%
The figure below show the inflation rate of Australia from 2012 to 1990
By the third quarter, the inflation by category of Australia can be summarized as below
Insurance and financial services 2.1
Clothing and foot ware -1.9
Food and nonalcoholic beverages 1.9
Reaction and culture -0.1
Alcohol and tobacco 5.9
Furnishings a and household equipment and services 0.0
The fluctuations of inflation rates in the country have been caused by both the domestic and the international events. As explained by Hossain (2014), the overall factors affecting inflation in the region can be grouped into two; first; there is the concept of excessive demand side conditions which attributed to the demand inflation. Secondly, there are the less favorable supply-side developments. These developments are majorly leading to the cost inflation.
Monetary Policy in Australia
The Reserve Bank of Australia is mandated with the responsibility of formulating and implementation of the countries monitory policy. According to Hossain (2014), monitory policy decision usually involves the setting of interest rate in the money market. As such, it can be as said that both the behavior of lenders and borrows who operate in the financial market are usually affected by the monitory policy of the country.
The Reserve Bank of Australia has a board that normally sets interest rates of the country. The interest rate in most case is carried out to achieve the following objectives; first to achieve the stability of the currency in Australia. Secondly, to achieve full maintenance of employment in the country and finally to achieve economic prosperity and the overall welfare of the people of Australia. The stability of the currency in most cases is usually interpreted to mean price stability. This implies that at any given moment, there should be a stable value of the Australian dollar. The stability can be achieved through purchasing power over the goods and services
For the inflation targets, this particular objective is usually made more explicit when it is joined with the bank’s inflation targets. Regarding this objective, both the government and the reserve bank of Australia have agreed that the flexible medium-term inflation target should be the framework used in achieving the medium term prices stability in the country. Also, the two parties have also agreed that the appropriate goals of the monetary policy of the country are to keep the consumer price inflation at arrange of 2 to 3 percent on average. As explained by… this kind of formulation by the two parties is significant for the natural short-run variation in inflation in the economic cycle. Consequently, the medium term of this objective provides for flexibility of the bank to set policies that can meet the board’s objectives. According to Hossain (2014), the 2 to 3 percent medium-term goals tend to provide a clear, identifiable performance benchmark. Another significant aspect of monetary policy in the country is the management of trade-offs. In most cases, the short run trade-offs that are usually faced by the policymakers.
As of November 2017, the monetary policy decision of the country was as flows. First, the conditions which are prevalence in the global economy were seen to be improving. As reported by Hossain (2014), the labor market of the region has tightened, and the trend is expected to continue in the country.
For the wage growth, the future prosperities of the wage growth in the country are considered to be low. Other factors which are related to the growth of wage aster the equity markets which is reported to remain strong in the country. The inflation according to Australia Bureau of Statistics has remained low and is currently running below 2 percent. According to this November statement, the inflation of the country is likely to remain low shortly. The low inflation in the country signifies the slow growth labor cost and also the aspect of increased competitive pressures.
The country’s dollar has been reported to have appreciated from the mid of 2017. The higher exchange rate exhibited by this move is expected to contribute to continued subdued price pressures in the Australian economy.
Fiscal Deficit and Supplies
The Australia is currently is considered to be on track to return to its budget surplus by financial years 2020-2021howver, the countries budget shortfall are set to widen in the next four years according to Chene et .al (2014),the overall underlying cash deficit for the country for the period ending 3oth June 2017 was recorded ta A$36.5 billion. This amount translates to 2.1 percent of the gross domestic product in the region. For the financial year 2017-2018 the overall deficit is expected at a$28.7 Billion. This amount translates to 1.6% of the country GDP (Chene et .al 2014).
To live within its means, the country has been balancing its budget and reducing the possible burden on the long-term debt. The government plans to keep its budget in balance by keeping most of its expenditure under control. At the same time, the Australian government looks for ways for creating the conditions for a much stronger economy that is set to allow its revenue to grow. In the coming fiscal year 2018-19, the country’s treasure Morrison Scott has predicted a deficit of about A$19.7 billion which is about 1% of the whole GDP. From 2018, the treasury see an A$10 billion deficit which will be about 0.5pecrent of the overall GDP (Hossain 2014).
According to Chene et al., (2014), the overall net effect of the budget improvement measures from the year 2013 totals to a$250 Billion. This figure comes as an improvement of the whole budget bottom line in respect to the medium term.
When it comes to the country surplus, according to the country treasury estimates, the total deficit of the country will be revised up slightly to about A$29.4 billion by the end of next year. This revisal will be done before it is returned to $7.4 billion surpluses for the same year. According to the government treasury, the wager growth is expected to increase from its current state of 2 percent to 3.75 percent
Also, the government is anticipating realizing about $28 billion more in the following year. The figure below illustrates the revue changes which is expected to take place in the following fiscal year
Income taxation receipts8% $21.4b
Sales taxes5% $3.2b
Excise and customs duty3.5% $1.2b
Other indirect taxation22% $1.3b
Non-taxation receipts2.3% $668m
According to Fitch rating agency, the county budget is not expected to go back to surplus by the year 2020. However, the debt level of the country will continue to come down even when the deficit will not go back to zero. One of the key issues which have been identified in repairing the budget ash been the difficulty faced in passing legislation. Cruelty, there is $13 expenditure savings, and also an about $1.5 billion which is worth of revenue increase have not yet gone through the Senate (Chene et .al 2014).
Yield on Government Bonds
The Australian government bonds are considered to be highly secure investment products. This is attributed to their huge returns which sets a benchmark on the market. The country usually issues bond which is known as the Commonwealth government securities. This kind of investment of optiosnusaly proved an investor with given set of predictable cash flow which is normally paid on a periodic basis.
The Australian bond has over the time presented the following benefits to the investors; first, they exhibit low risk. Secondly, the kinds of bonds which are traded have a regular income, and finally, they are easy to buy and sell. The available bond can usually be bought and sold exchange -trades treasury bonds.
The government bond yield tends to vary depending on the maturity period and the rate of interest which is charged. The table below is an illustrated by the Australian government bond yield for a year, 2, years 5, yeaear10 and yeasr15. It also has the coupon and the price of the bond
Name Coupon Price Yield
Australian government bond year 2 yield 2.75 101.68 1.82%
Australian government five years yield 5.75 115.66 2.15%
Australian government bond ten years yield 2.75 101.68 2.55%
Australian government bond fifteen years yelled 4.50 120.67 2.82%
In this section, there is close attention to investment opportunities through analysis. In Australia, the S&P/ASX 200 is the accredited and known institution where stock is invested. The index constituents in it are derived from the various companies that are listed in Australian Securities Exchange. The index is designed in a way that it measures the performance of the first 200 largest stocks that are listed in ASX. The performance of the stock is shown below.
Chen, Y. C., Turnovsky, S. J., & Zivot, E. (2014). Forecasting inflation using commodity price aggregates. Journal of Econometrics, 183(1), 117-134.
Daley, J., & Wood, D. (2015). Fiscal challenges for Australia. Grattan Institute.
Hossain, A. A. (2014). Monetary policy, inflation, and inflation volatility in Australia. Journal of Post Keynesian Economics, 36(4), 745-780.
Kramer, T. (2014). Factors affecting monetary policy in Australia. Ecodate, 28(2), 2.