Assessment of the Australian economy
When investing there is certain factors that the investor should put into consideration to analyze the potential for maximum returns from any investment venture. Hence, when deciding whether to invest in any country it is essential to conduct a study on the trends of the country’s economy based on these indicators. The indicators are the country’s economic trend in relation to the world economy, the GDP growth rates, rates of inflation in the country, interest rates offered, and the currency exchange rates in relation to other currencies and the productivity of the country (UBS Investment Bank, 2012).
Theses are the factors that determine the performance of the economy of that country in the global world economy. When using the top-down fundamental analysis, the investor will study the trends starting at the highest level of economic indicators down to the lowest level. Therefore, this means that they will consider the global indicators such as exchange rates, energy prices and inflation rates, before looking at national indicators such as the nation’s GDP, interest rates, the productivity level in that country. The effect of foreign competition on the country’s productivity is also measured.
After this, the study is narrowed down to the regional economy in order to find out the most economically viable regions in the country. This is done through analysis of the price levels in different regions, competitiveness in competing products and the total sales in various regions. After this, the search is narrowed down to the most suitable region and the most economically viable business venture is undertaken. This process is to ensure that the investor gets into the business with all the facts hence this will enable him to make wise investment decision, focusing on the area with the most promising returns.
Since the method being used for the analysis of the viability of investment condition of the Australian economy is the top-down fundamental analysis, the trends in the global economy will have to be studied. One of the core indicators of the economy is the Gross Domestic Product. The GDP is the total market value of the final production of goods and services produced within a country within a period usually of one year. According to the Reserve Bank of Australia Chart-Pack, the GDP of the world has been volatile though inconsistently rising from the 2000’s towards around 2008 where the world underwent the global recession dropping below the zero mark (2012). The GDP growth rate for Australia has experienced a slowdown due to inflation and the effect of the changes of the world economy on the Australian trading ability, varying at greater proportions than the rest of the world. Initially, while the world GDP was growing, the GPD of the Australian economy was dropping hence showing that the Australian currency was doing poorly in the global economy (ABS, 2012). The irregular and constant rise and fall of the GDP graph level for the Australian economy shows the unpredictability and unreliability of the Australian economy.
The other indicator of the performance of an economy in relation to the world economy is the inflation levels in the country. The core inflation level of the leading world economies rises and falls depending on the level of the GDP (IMF, 2012). This is because if the market value of production in a country is low, the currency will trade at a lower value hence making importation of goods more expensive. This will result in increased prices of available goods due to the scarcity of these goods. This will result in greater borrowing of loans to invest in the local businesses hence in the short run the inflation will be increased. Firstly, this will be because of the increased prices of the goods in the market and secondly because of the availability of funding from the banks hence there will be increased capital in circulation. However, in the end due to increased borrowing, the interest rate offered by banks will be increased to discourage borrowing and due to increased income from production in the local industries, the GDP will be lowered leading to decreased inflation.
According to the statistics provided by the RBA (2012) in the period where there is a drop in the GDP, there is an increase in the inflation level and this may be explained in that with a lower GDP the country’s currency is weaker hence its value is lower. Therefore, the same amount of money will purchase fewer commodities than it would in the periods where the inflation level is lower. Since the period that there was an economic downturn in the world economy, Australia’s economy has been recovering though unsteadily (ABS, 2012). Therefore, the consumer price inflation levels have dropped making the economy a viable market for investors as consumers have the spending power and the currency is strong.
When considering the consumer price index, the current market prices and the new capital expenditure are put into consideration. This enables the investor to understand both the market that is available and the potential of the investment to capture new markets and expand. The investor should also consider the number of businesses in the area of interest and their market share in relation to the available consumers of their products or services. Depending on the spending ability of the market and the economy trends of their region of interest, the investor should consider their ability to attract new consumers in a manner that will lead to maximum profit gains and growth of the business in the face of competitors.
As is indicated in the NAB Business Survey statistics, the business condition of corporations shows an unsteady state of the overall financial condition, with a noted rise in the profit levels towards the year 2012 (NAB, 2012). The business confidence placed in the Australian economy is also volatile. This is because of the inconsistency of the market that is constantly changing as it is affected by interest rates, consumer price index, the availability of credit and money from credit facilities, balance of payment of the country, the exchange rates and banking indicators.
According to ABS statistics, the credit level in the Australian economy has been raising between the period of ’92 and ’08 a trend that resulted in the high inflation level, in the 2008 period (2012). This is because there was so much capital in circulation. This saw an increase in the business investment level, in the country, as credit was readily available to inject into the businesses. However, the trend was opposite in funding for housing therefore, in the 2008 world economic crash the business and personal level access to credit dropped, but this was not so in the housing department (ASE, 2012). After the 2008 inflation period, credit facilities have been significantly lowering their credit provision in an effort to stabilize the market and reduce dependence of businesses and individuals on credit.
The business capacity utilization of the Australian economy has not reached its maximum potential and according to the NAB Business survey, there are still many opportunities available for investment and growth in the Australian economy (NAB, 2012). Therefore, an investor should ensure that they understand the overall regional output share in relation to overall national output and invest in the area that shows the most production opportunities and has the potential to bring the greatest returns. The investor should also learn about the unemployment rates of the nation and the region, and based on the trends shown in the ABS statistics the unemployment rates have been declining in the recent past indicating that business growth has been experienced demanding that companies employ more employees (ABS,2012). This is an indicator of the growth of the economy making Australia a good investment opportunity.
Yet another factor that is a determinant of the investment potential of the Australian economy is the state of balance of payment and external position of the country. According to the statistics by APRA, the level of exports of bulk commodities is higher than that of the resources and services (2012). However, the level of total imports is higher than the level of total exports and this leads to the country spending more than it is earning from the exports. This is because it exports raw materials that fetch a lower price level than the capital goods imports that require a higher price.
The foreign liabilities of the country are greater than the foreign assets meaning that the Australian government owes other governments more than what it is owed by their debtors (Australian Treasury, 2012). However, the amount that the Australian government has earned through this lending is more than twice of the money that it has lent showing that is fairing well in the world economy. According to the graph by ABS on the net capital inflow in the country’s economy, the debt level is higher than the equity level and this indicates that the country’s external position in the global economy has not fully boomed. However, in the period between 2008 and 2012 the country’s equity level has been rising. This indicates a growing confidence by investors in the country’s economy.
Before investing, another indicator that is important to an investor is the market share that the Australian economy commands in the world economy. According to the Australian and world share price indices, Australia in comparison to the world performance is doing great as its share market has been growing over the years at a higher rate than the average world economy (Bloomberg, 2012). The bond issuance in the Australian government is yet another factor that is of interest to the investor as it determines the level of investments in the market. In the information provided by ABS and RBA, the level of bond issuance has been consistently rising showing that the level of investment has been constantly on the increase. This is a good sign as it shows that there is investor confidence in the Australian economy as the level of opportunities identified is high and promising.
Banking indicators also give a guideline to investors of the state of the economy in the country. In the domestic, major banking, the net interest level has been declining consistently indicating that the inflation levels have been declining. The lowered interest levels are a positive sign to the investor, as credit borrowing will be repayable at a lower price and the decline in inflation will result in increased profits.
Guided by the economic indicators discussed it is safe to say that Australia is a viable investment destination as it offers an attractive prospect for investment. As observed in the trends, the inflation levels are declining with time. The investment opportunities are not saturated hence the investor is assured of growth. The Australian currency is fairing well in the world market. This shows that the business will be relevant not only locally but will perform well even in international trade. With the increased general investor confidence, the investor is assured of growth in the business and attractive returns.
Australian Bureau of Statistics. (2012). Retrieved from: http://www.abs.gov.au/
Australian Prudential Regulation Authority. (2012). Retrieved from: http://www.apra.gov.au/Pages/default.aspx
Australian Securities Exchange. (2012). Retrieved from: http://www.asx.com.au/
Australian Treasury. (2012). Retrieved from: http://www.treasury.gov.au/PublicationsAndMedia/Publications
Bloomberg. (2012). Retrieved from: http://www.bloomberg.com/
International Monetary Fund. (2012). Retrieved from: http://www.imf.org/external/index.htm
National Australia Bank. (2012). Retrieved from: http://www.nab.com.au/
Reserve Bank of Australia. (2012). Retrieved from: http://www.rba.gov.au/
Reserve Bank of Australia. (2012). Retrieved from: http://www.rba.gov.au/chart-pack/
UBS Investment Bank. (2012). Retrieved from: https://www.ubs.com/global/en/legalinfo2/Australia.html
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