External Stability and 2024 Trends

Syllabus Topic

HSC Topic Four - Economic Policies and Management

Economic objectives in relation to:

• external stability

What is External Stability?

External stability refers to a nation's ability to maintain a balanced relationship with the rest of the world concerning its international trade and financial transactions. It involves achieving equilibrium in key economic indicators such as the balance of payments, exchange rates, and international competitiveness. A nation with external stability can sustain healthy levels of exports and imports, ensuring that its trade is balanced or at least manageable over time. Additionally, it maintains stable exchange rates to promote confidence in its currency and attract foreign investment. External stability is essential for fostering economic growth, stability, and resilience to external shocks, thereby contributing to overall economic well-being and prosperity.

The RBA’s Role

The RBA ensures external stability through monetary and fiscal policy tools, focusing on key strategies like interest rate adjustments and government spending. In monetary policy, the RBA uses interest rates to influence the exchange rate, crucial for external stability. Fiscal policy, including budget decisions, plays a significant role. The government budget outlines planned expenditures and revenues, impacting the balance of payments and debt/surplus. By employing these strategies and monitoring indicators like trade flows, the RBA aims to maintain stability conducive to sustainable growth.

2024 Trends

• Cash rate target: Remained unchanged at 4.35% by the Reserve Bank of Australia (RBA). The unchanged cash rate target reflects the RBA's cautious approach to monetary policy, aiming to support economic growth and maintain stability in exchange rates, and ensure stability in financial markets and investor confidence.

• Current account balance for March quarter 2024: Deficit of $4.9 billion.

• Factors contributing to deficit: Decrease in trade surplus on goods and services, increase in net primary income deficit.

• Capital and financial account surplus: Increased significantly by $16.9 billion compared to previous quarter due to higher inflows of foreign investment into Australia compared to outflows.

• Net international investment liability position: Decreased to $730.3 billion, marking a $103.9 billion decrease due to factors such as reduced borrowing from overseas or increased Australian investments abroad.

• Exchange rate movements: Australian dollar depreciated, with AUD to USD declining from 0.68 in December 2023 to 0.66 in June 2024.

• Impact of Australian dollar depreciation: Increased international competitiveness for Australian exporters, leading to higher export volumes and reduced import volumes over time.

• Initial widening of current account deficit due to depreciation, followed by subsequent increase in net exports, contributing to balance of payments.

• Depreciation also affected net income deficit, with valuation effects on Australia's net foreign liabilities.

Overall, these trends reflect the dynamics of capital flows and investments between Australia and the rest of the world, exerting significant influence on the country's external financial position and overall economic stability

Sources

RBA: Statement on Monetary Policy 2024

Australian Government Budget: 2024-25 Budget

RBA: Cash Rate Target

RBA: Exchange Rates and the Australian Economy

ABS: Balance of Payments and International Investment Position