MACROECONOMICS

Macroeconomic Analysis of the Australian economy



Macroeconomic Analysis of the Australian economy

Introduction

The Australian economy and the outlook that was given by the government at the start of the year are quite different. The construction industry, the housing industry as well as the retail industry show a slump in business activity whereas the figures given by government present a totally different picture. The change from the preceding quarter is a rise of one percent while comparison with the previous year shows a rise of two and a half per cent (Jackson, 2006, p. 25). The pause on interest rates by the federal bank is one of the major driving forces behind this change. The economy has stimulated as the consequence of the cushion given by the Reserve bank to the housing mortgage in the form of decline in interest rates. The paper discusses the outlook and the performance of Australian economy for the current year from the perspective of consumer confidence in the economy, investment demand and aggregate spending and multiplier theory.

Consumer confidence and consumption schedule

Consumer confidence refers to the level of optimism found in the people of a country towards the economy. This also refers to their view of their own financial stability as a result of changes in the macro environment. It is one of the indicators of the shape and direction of the economy in that consumer spending is a function of consumer confidence. If people are confident and have appositive outlook of the economy, they will be spending more and their purchases will ultimately boost economy making the situation on ground a true reflection of their held propositions. On the contrary, when the consumers develop a general negative sentiments towards the economy they try to save more and spend less, leading to a contraction in the country's economy (Write, 2012, p. 18).

The relationship between consumer confidence and consumption schedule is rooted in the belief that a sentiment change or a change in the expectations and opinions of the consumers can determine the course of the economy. It has beyond debate and economically established that consumer sentiment index has the ability and power to predict consumption patterns in the near future. A boost in consumer confidence can lead to a positive change in the consumer schedule. This is so because private consumer consumption makes up the largest part in the Gross Domestic Product or GDP. The business cycle can be evened out if the makers of the policy are well aware of the consumption patterns dependent significantly on the consumer sentiment.

The relationship between consumer confidence and consumptions schedule is a causal one. However, it is also imperative to state in this context, that the behavior of consumption in Australia is very different from that in US in that it is more of a permanent income hypothesis. The Australian consumer confidence for the period Jan 2009 - July 2012 is given hereunder. This consumer confidence has been calculated taking into account people's view of their financial condition in ...