ACBUS108A Negative Impact Of Changes In Business Cycle And Interest Rate Assessment Answer

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Question :

Subject Guide: ACBUS108A 

Personal Learning Journal 2 — written due week 11, oral due week 12 Refer to the Overview of the most recent Reserve Bank of Australia Monetary Statements. 

Consider any developments in the economy in recent quarters by reviewing the minutes of the monetary policy meetings of the Reserve Bank Board, as well as the trends in key  economic indicators as published by 'ABS'.

Pretend that a small business client has asked what you think will happen to "business cycle" and economic activity over the next 6-12 months. This client is an exporter of a unique product and has a significant fixed rate loan.

Based on your readings:

1. Decide which direction you think interest rates will move, or if you think they will remain the same. (brief summary statement). Clue — link reasoning back to their effect on GDP/activity.

2. Write a brief summary highlighting 3 KEY reasons for your belief of what stage of the "business cycle" you believe the economy to be at. (minimum of 400 words). Clue — link the reasons back to their effect on GDP; or their relationship with GDP. Discussion & theory in parts 1 & 2 should correlate/concur.

3. Explain to the client what impact this might have on their budget forecasts and how. (Minimum of 200 words).

Your written submission must be written in words you would actually use if emailing a client (please no colloquialism and contain full sentences and well-constructed paragraphs.

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Answer :

Economy

TASK

  • Introduction

With the ramified changes, there is seen changes in the revenue and expenditure of the economics of the country which directly and indirectly affect the inflation rate, GDP, interest rate, purchasing power of the people and consumption rate in the country. This paper divulges the key aspects of the summary about the interest rate position and key reasons of the changing in the business cycle and changes in the interest rate and its negative impact on overall development of country and business cycle in economic. 

1: Summary about interest rates position

According to the information released by reserve bank of Australia, it has been seen that there is downfall in cash rate in last five month time. It would take benchmark borrowing rate that set a record reduction of 0.75% (Brouwer, and Ericsson, 2018). The Australian dollar is also being dipped to 0.4% to US 67.00c. In opinion of certain economist further rate cuts is being seen in present year. The share market has been enjoyed their best day in close months as per reserve bank decision of cutting down cash rate for a 3rd time in this year (Reserve bank of Australia, 2017). The money supply would impact interest rates as well as inflation because they are major determinants of employment, consumption levels and so on.  All these will enhance money supply and hence decrease interest rate. Interest rate would impact exchange rate that can have a notable implication on economic activity and inflation in Australia. A decline in cash rate will lowers interest rates in Australia people to those in other nation. 

2: Key reasons 

In accordance with Australian economy situation most people tend to failed in recognizing state of business cycle. There are mainly four phases of business cycles such as expansion, peak, contraction and trough. According to last three month, it has been analysed that federal election seems to have unexpected return of conservative coalition body. Hence, it is also seen that country central bank which is control by Reserve Bank of Australia tend to cut the interest rate twice to 1.00 percentage. The rate of interest decline partly reflects the overall performance of Australian economy in last 12 months. The positive news is that economic slowdown is not being ordinary to last, as plenty of negative aspects that have pulling along with growth are starting to fade. As analysed earlier, RBA has already being cut down interest rates by 50 basis point with market estimation, but it further cuts of 25-50 basis point over next 12 month.  There are certain reasons that can help to examine present phase of business cycle which is going in Australia (Australian Bureau of statistic, 2019). It has been seen that Australian economy is going with peak to trough phase in their business cycle which is being shown in below mentioned table. 

Peak
Trough
Contraction
Expansion
Cycle
Peak to trough (months)
Trough to peak (months)
Peak to peak (months)
Trough to trough (months)
Jan-11
Aug-12
19
20
44
39
Aug-13
Mar-16
31
12
31
43
Jan-17
Jun-17
5
10
41
15



ongoing


Average durations2
21
24
45
45
Standard deviations2
9
12
13
18

Fig: Phases of Business cycle in Australia.

(Australian Bureau of statistic, 2019).

Unemployment claims: There are number of workers claiming unemployment advantage topped 10% in 2009, but it has been steady as economy surprised with 40000 additional jobs. Increase unemployment rates are generally seen as indicators of issues for economy. It holds constant with 5.2% as surprise job creation fluctuation offsets an improved in number of people those are searching for work. With 1% decrease in GDP will have less than 2% increase in unemployment rate (Brouwer, and Ericsson, 2018).

Interest rate tends to low: It has been seen that during business cycle period, interest rate is crucial reason for economy slow down. It means that it would impact exchange rate because they can have a notable implication on economic activity. Because of cash rate downfall interest rates gets affected and have negative chance of growth in coming 6-12 months (Kim, 2018).

Inflationary pressure develops: According to the statement mentioned in RBA, decrease growth in expenditure and investment needs to keep inflation at lower intensity; it would results in low minimum results and also increases unemployment. A higher inflation is being estimated to increase uncertainty level in economy. It has been seen that with increment in inflation there is downfall in buying power of money because of which GDP get decrease. Cost based inflationary pressure could rise in terms of units wage rate, increase import duty as well as price of raw materials those are primary element used in manufacturing process (Australian Bureau of statistic, 2019).

3: Impact on budget forecast 

According to statement mentioned ABS, it has been analysed that slow down of economy in accordance to interest rate can have negative impact on overall development of country (Leiva-Leon, 2014). It will also have certain implication on forecasted budget that has been prepared by Australian finance department. The business cycle is essential aspect for businesses for every type because it would directly influence demand for various products. It has been seen that government deficit is related with growth in long-term interest rate. As government used to increase flow of money to fulfil deficit by selling bonds, higher cost will increase borrowing. It is a critical planning tool which is used by organisation. Budget estimation are also get affected because of actual revenue received is not more than initial value which was anticipated. Extensive forecast assume a high rate of growth is having maximum potential for inaccuracy than conservative assessment based on earlier year information (Reserve bank of Australia, 2017).

  • Conclusion

After assessing the available information, it could be inferred that budget forecast or estimation is done on the basis of the related factors of the economic such as inflation rate, GDP, interest rate, purchasing power of the people and consumption rate in the country. Nonetheless, it is found that Budget estimation are also get affected because of actual revenue received government deficit which are related with growth in long-term interest rate.