The Economy of Australia - Case Study Example

Forecasting project During 1991, the economy of Australia was undergoing a period of recession but soon it saw unprecedented growth in its economy with an expected rate to be 3.7 percent. The growth enabled the Australian economy to 3.7 percent and unemployment to fall from 11 per cent to 5 percent. The growth has long-term beneficial effects on Australia’s economy as a whole. It also got privileged to have an economic boost from the main trading partner, Japan and the increasing and new markets of China and India gave them good platform for its exports of raw materials. The export of minerals and metals in abundant quantity has enabled the Australian Dollar to reach at much stronger position as compared to other nations despite the fact that deficit is seen in the current account. The increase in the trade deficit is due to its continuous struggle with the industrial sector as compared to its competitive nations. And another challenge in front of Australia is inflation due to labour shortage. (Economics Help, Online) It is not surprising if it is said that the Australian dollar is fifth largest currency in trading in the world. It is after the US Dollar, Euro, Yen, and Pound Sterling and accounts for 2% of total world output. It’s fifth largest on account of its close ties economically with Asia and its stable economy and to the commodity prices. The future of the dollar as suggested depends on the strength of commodity prices, interest rates and current account deficit. With the prices on the rise all over the world, investment of dollar would be best option. With the rise in interest rates and current account deficit, the Australian interest rate would also rise. But it is also true that on account of the current account deficit, dollar could be devalued. (Economics Help, Online) To predict the future rate of Australian dollar as compared to other nations like United States, Euro, Japan, United Kingdom and New Zealand, and to see which of the nation is best prospect we should compare the current exchange rates in accordance with the models like Purchasing Power Parity (PPP), Fisher effect (FE), Unbiased Forward rate (UFR), technical analysis and Assets markets Approach. Now, Euro is being considered as a dominant currency. As regards to one AUD Australia, Euro was 0.5921 and in AUD 1.70619 as on 18th August 2008. The Euro economy is showing the signs of quick growth with restrained inflation. The economic growth is currently stable at 2.5 per cent with the rate of inflation at 2 per cent. This enables a good platform for Euro to have a strong position. Currently the interest rates are at 4.66 per cent. As regards GBP, currently 1 AUD equaled to 0.4668 GBP as on 18th August 2008. Sterling was looking absolutely right until the middle of the last week increasing the rates from $2.16 to $ 2.20 but as soon as week got over, it went down and pound rate dropped to $2.13. The trade continued between $ 2.13 and $ 2.16 and again opened at $ 2.14 by the first day of the next week. It was really a very bad week for pound. First of all it did not start well and then got even worse. It owes to bad economic position. The Producer Price Index saw the gap got narrowed between the costs and the prices of the manufactured goods. There was deterioration in trade deficit and along with that the British Retail Consortium also saw the sales to fall to 1 per cent. (Moneycorp, Online) With the prices of soft, metals and energy getting lowered on Tuesday, Australian Dollar saw the 12th consecutive fall against the US Dollar. It was Aussie’s longest days of loss period since 1975. Australian dollar appreciated against the United States on account of the United States Current Account Deficit, rise in prices of commodities produced by Australia and more interest rates than America and on account of the weakening America’s economy. US dollar 1 AUD was 0.8723 and in AUD, it was 1.1526 as per 18 August 2008. Japan economy is one of the biggest trading partners of Australia. The cooperation of Japanese government with industrial world enabled Japan to become strong in work ethics and attain skills in technology, and minimum allocation for defense purposes made it the second largest economy in the world, immediately after the US that stands to around US$4.5 trillion as regards its GDP and is third in case of purchasing power parity after the US and China. 1 AUD was 96.162 Yen and 1 AUD=0.0105637 Yen as on 18 August 2008. Japan’s GDP is 1.00 per cent and trade balance is 91.15. (Trading Economics Asset Management, Online) 2008 saw the economy of New Zealand slowed down increasing the chances of recession and add to it speculations of cooling housing market, increase in interest rates and rising inflation. Data from statistics department New Zealand, produced on 27th June 2008, showed much abysmal economic performance in January-March 2008. The economy reduced by 0.3% in real terms as compared to the previous quarter. (Economist.com, Online) 1 AUD = 1.2315 New Zealand Dollar and in AUD it is 0.817308. According to Reserve Bank of Australia, rates of Australia remained at level of 7.25 percent. This showed Australia having advantage over “Japan’s with 0.50 percent, the United States’ 2.00 percent, Euro Zone’s 4.25 percent and even the United Kingdom’s 5.00 percent as primary rate through June.” (DailyFX, Online) But the interest rate in New Zealand is highest at 8 percent. If we compare all these economies we would find that the economy of Japan is best proposal. By the help of technical analysis method, we can judge if the decision to take Japan as an economy for investment is right or wrong. These technical analysts try to identify the trends and reversal of trends. In this, comparison is made on the future price changes with the past. If we see the inflation rate of Japan, we would find that it is 27 years high in July. Japan’s wholesale inflation rate accelerated to a 27-year high in July leading to reduction in corporate profits and rise in bankruptcy level and gave a grave-threatening note to the economy’s long expansion. The rates companies are paying for energy and raw materials is standing at 7.1 per cent and the Yen was traded at 110.15 dollars. When we compare the inflation rate in the previous years, it was all time low. If the bank increases the interest rate, inflation will sure to reduce in near future. Australia’s inflation rate too is rising but at a rate of 4.2 per cent as compared to Japan. (Clever With Cash, Online) And one of the biggest reasons for this inflation is rise in prices. If we see this rate, any one can speculate Japan is not a good market for investing 100 million dollars but in short run technical analysis and looking at the previous low inflation, Japan is a booming market and is considered as a very strong market economy. To invest 50 percent in the Japan could be a promising bet. It would boost the economy of Aussie. The dollar securities rose to 12 per cent between the months of November to April for Japanese overseas investments as compared to 6 per cent in 2005. Investors had taken total advantage of the differences that had occurred between the interest rates of Australian with Japan, where the borrowing cost was 0.5 per cent. And it is quite true that yen would be more if prices will decrease as predicted by Taisuke Tanake, a chief Japan currency strategist of Lehman. As per the figures from the Tokyo Financial Exchange Inc, Japanese investors have begun to reduce their bets and it was predicted that there was a profit for Australian dollar against the yen, which fell to 39,449 contracts on July 22, less than half the record of 79,920 contracts on July 1. (Goodman and White, Online) And so on 20th October will see Australian dollar have a good day. The 50 per cent could be invested in New Zealand, as the interest rate of New Zealand is high though New Zealand’s rate of economy is going all time low, but when we see the interest rate New Zealand is a best bet to fix other 50 million dollars. Low inflation along with the high interest rates in some of the developed nations of the world has benefited the interest rate investors. If we see its agriculture and natural resources, New Zealanders are leading a good life. Its “commodity-price bullet train” has led to the increase in prices of all kinds of food, metals and energy products. In future, the exchange rate would peak up in Australia’s favour, which could reach to 1. 5 or 1.78 doubling and naturally the profit of Bank would be doubled. USD Per Australian Dollar Currency Exchange Forecast US Dollars to One Australian Dollar. Average of Month. Month Date Forecast Value 50% Correct +/- 80% Correct +/- 0 Jul 2008 0.9620 0.000 0.000 1 Aug 2008 0.895 0.017 0.028 2 Sep 2008 0.885 0.021 0.034 3 Oct 2008 0.891 0.024 0.039 4 Nov 2008 0.898 0.026 0.042 5 Dec 2008 0.899 0.027 0.045 6 Jan 2009 0.908 0.029 0.048 7 Feb 2009 0.901 0.030 0.050 8 Mar 2009 0.915 0.032 0.052 Updated Sunday, August 10, 2008 USD Per Australian Dollar Currency Exchange Rate Past Trend Present Value & Future Projection WORKS CITED Clever With Cash. “Australia's Inflation Rate Rises to 4.2%” (Internet) 1 May 2008. Available: http://cleverwithcash.com/articles/australias_inflation_rate_rises.php, August 26, 2008. DailyFX. “Australian Dollar 2008 Q3 Outlook” (Internet) 4 July 2008. Available: http://www.actionforex.com/long-term/long-term-forecasts/australian-dollar-2008-q3-outlook-2008070451862/, August 26, 2008. Economist.com. “New Zealand's economy.”(Internet) Jun 30th 2008. Available: http://www.economist.com/displayStory.cfm?story_id=11653291, August 26, 2008. Economics Help. “Predictions for Australian Dollar 2008” Internet. Available: http://www.economicshelp.org/2007/11/predictions-for-australian-dollar-2008.html, August 26, 2008. Goodman, Wes & White Stanley. “Australia Dollar Peak Pushes Traders to Yen on Growth (Update2)” (Internet) 28 July 2008. Available: http://www.bloomberg.com/apps/news?pid=20601213&sid=aMNtRbiXkxiw&refer=home, August 26, 2008 Investopedia. “International Fisher Effect – IFE”. (Internet). Available: http://www.investopedia.com/terms/i/ife.asp, August 26, 2008. Moneycorp. The AUD - Australian Dollar weekly update. Internet. (26 August 2008) Available: http://www.moneycorp.com/headline_mail/AUD_MC.html, August 26, 2008. Trading Economics Asset Management. “Japan Economy.”(Internet). Available: http://www.tradingeconomics.com/Economics/Economic-Analysis-Summary.aspx?Symbol=JPY, August 26, 2008. Read More