Activity 6g: Factors affecting the key macro variables
- Since the middle of 2022, economic growth trended down from an annual 3.7% to 1.0% by the end of June 2024. Over this same period, inflation trended down from an underlying rate of 4.9% to 3.9% and the unemployment rate trended up from 3.6% to 4.1%.
- The increase in interest rates during the first half of 2022 [as the Reserve Bank of Australia tightened monetary policy] exerted downward pressure on aggregate demand and economic growth, which in turn would have contributed to downward pressure on inflation and upward pressure on the unemployment rate.
- Over the course of 2023-24, the continued growth in gross disposable income (GDI) impacted positively on aggregate demand, economic growth and employment (decreasing pressure on unemployment) as well increasing pressure on inflation. This occurs because the continual growth in incomes helped to spur growth in spending (e.g. Consumption and Investment), which fueled AD and economic growth, as well as adding to demand inflationary pressures in the economy.
- Between June 2022 and June 2024, the value for the AUD fell from USD 0.69 to USD 0.66. This depreciation increased both cost and demand inflationary pressures. On the cost side, the lower exchange rate resulted in more expensive intermediate and capital imports which effectively raised the costs of production for businesses. In addition, on the demand side, the lower exchange rate led to an increase in the international competitiveness of Australia’s tradables sector. Exporters faced a higher demand for goods and services, as did domestic import competing businesses (because imports became more expensive). This contributed to a rise in AD and demand inflationary pressures. The fact that inflation continued to fall over the last two years were due to a combination of other factors, such as higher interest rates and the easing in global supply constraints. With respect to the effects on economic growth and unemployment, there were positive demand side effects (due to the effects on competitiveness) but negative supply side effects, due to the impact on costs of production. The demand side effects outweighed the supply side effects owing to the fact that most domestic producers and exporters enjoy increased demand when the exchange rate fall, yet the costs of production only rise for a relatively smaller number of firms relying on imported inputs.
- Consumer confidence fell over this time, from an index of 86.4 to 79.2, indicating that consumers were more pessimistic rather than optimistic. The decrease in confidence overall is a factor that contributes to the lower rates of economic growth, higher unemployment and lower inflation. This is because lower confidence causes consumers to spend less, which leads to a fall in consumption, AD, economic growth (+ employment) and demand inflationary pressures.
- Since June 2023, the wage price index continued to grow, at an increasing rate, highlighting that wages paid to employees rose over the period by an ever increasing rate. Ordinarily, this would contribute to growth in consumption demand, boosting aggregate demand and economic growth. However, increasingly, the growth in wages did not keep pace with the growth in prices, which resulted in a decrease in real wages. This reduction in purchasing power then has the opposite effect on aggregate demand and economic growth and adds to the rate of unemployment.
- The size of the LF rose over the period from 14.5m people to 15m. This is partly due to the ongoing tightness in the labour market and the rise in the participation rate (as people re-entered the labour force), as well as the ongoing effects of the re-opening of Australian borders to foreign workers and the rise in immigration numbers. A rise in the labour force (labour supply) reduces pressure on the costs of production (e.g. because the higher supply of labour exerts downward pressure on wages). This decreases production costs and increases aggregate supply, reducing price pressures and inflation, and raising AD, economic and employment growth (decreasing pressure on unemployment).
- Global growth plummeted rose slightly over the relevant period from 2.7% to 3.2%. This is likely to be a factor that would contribute to a stronger rate of economic growth in Australia, because it contributes to stronger growth in export demand, as well contribute to a more favourable investment climate overall, raising I and X as components of AD. This contributes to a stronger rate of economic growth (+ employment) and a rise in demand inflationary pressures. The fact that economic growth and inflation fell over this time and the unemployment rate rose is due primarily to other factors, such as higher interest rates and low confidence levels.
- Oil prices rose over the relevant time period, from $70.66 per barrel to $82.33 per barrel. This led to a rise in petrol/fuel prices over this time, which increased the headline rate of inflation. However, given the significance of these price rises (and/or the fact that they were relatively one-off/volatile price movements), they were extracted from the underlying measures and, therefore, had minimal impact on the underlying inflation rate. With respect to economic growth and unemployment, the oil price rise was a negative factor, reducing the rate of economic growth and increasing the unemployment rate.