Activity 6(g)

Activity 6g: Factors affecting the key macro variables

  1. Since the middle of 2021, economic growth trended down from an annual 9.1% to 3.6% by the end of June 2022. Over this same period, inflation trended up from an underlying rate of 1.6% to 4.9% and the unemployment rate trended up from 4.9% to 3.5%.
  2. The increase in interest rates during the first half of 2022 [as the Reserve Bank of Australia tightened monetary policy] would have started to exert 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. [The fact that inflation continued to rise and unemployment continued to fall reflects the fact that other providing forces were impacting prices and jobs as well as the fact that higher interest rates have a lagged effect on the economy – up to two years for the full effects to take hold].
  3. Over the course of 2021, 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.
  4. Between June 2020 and June 2021, the value for the AUD rose from USD 0.69 to USD 0.75 by June 2021). This decreased both cost and demand inflationary pressures. On the cost side, the higher exchange rate resulted in less expensive intermediate and capital imports which effectively reduced the costs of production for businesses.  In addition, on the demand side, the higher exchange rate led to an decrease in the international competitiveness of Australia’s tradables sector.  Exporters faced a lower demand for goods and services, as did domestic import competing businesses (because imports became less expensive).  This contributed to a decrease in AD and demand inflationary pressures. With respect to the effects on economic growth and unemployment, there were negative demand side effects (due to the effects on competitiveness) but positive 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 suffer from lower demand when the exchange rate rises, yet the costs of production only fall for a relatively smaller number of firms relying on imported inputs.
  5. Since June 2021, consumer confidence fell from an index of 107.2 to 86.4 by June 2022 indicating that consumers were more pessimistic rather than optimistic. The decrease in confidence overall is a factor that ordinarily 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. The fact that inflation rose and the unemployment rate continue to fall indicates that there were other factors exerting pressure on these macroeconomic variables (such as cost inflationary pressures and growth in incomes).
  6. Since June 2021, the wage price index continued to grow, highlighting that wages paid to employees rose over the period. 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 has the opposite effect on aggregate demand and economic growth and (if continued into the future) should add to the rate of unemployment.
  7. The size of the LF rose over the period from 13.8m people to 14.1m. This is due to the ending of the recession experienced in Australia (where many re-entered the labour force) as well as the re-opening of Australian borders to foreign workers.  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).  The fact that inflation has not fallen is due primarily to other factors, such  asCOVID-19 global supply chain issues.
  8. Global growth plummeted fell over 2022, falling from a a very high rate of 6.1% to 3.2% by the middle of 2022. This is likely to be a factor that contributed to lower rates of economic growth, because lower overseas growth contributes to weaker growth in export demand, as well contribute to less favourable investment climate overall, reducing I and X as components of AD. This contributes to weaker economic growth (+ employment) and a fall in demand inflationary pressures.  The fact that inflation has not fallen, and the unemployment rate did not rise is due primarily to other factors, such asCOVID-19 global supply chain issues and continued strong growth in domestic incomes.
  9. Oil prices rose over the relevant time period, from $73.52 per barrel to $107 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 rate of inflation.  With respect to economic growth and unemployment, the oil price rise was a negative factor (reducing the rate of economic growth) but it failed to prevent the unemployment rate from falling due to the existence of other forces impacting on the labour market, such as the strong growth in domestic incomes and a lower exchange rate.