Quick questions on The international business cycle and economic interdependence: HSC Economics Topic 1

The international business cycle is the synchronised pattern of expansions and contractions across national economies. While individual countries have their own cycles, the global economy as a whole displays a coordinated pattern, especially since the 1990s.

Five channels of transmission:

Within the global cycle, regional cycles also exist. The euro area moves together because of the single currency and the EU single market. East Asia is closely synchronised through trade and FDI linkages (Japan, South Korea, China, ASEAN). North America (US, Canada, Mexico) is linked through the USMCA.

The international business cycle is shaped by:

A textbook synchronised global downturn. Triggered by the collapse of the US subprime mortgage market, amplified by global financial interconnections (Lehman Brothers bankruptcy, September 2008). World real GDP contracted by 0.1 percent in 2009 (IMF), the first contraction in the post-war period.

When one major economy slows, demand for imports from trade partners falls. A 1 percentage point fall in Chinese GDP growth is associated with roughly a 0.3 to 0.5 percentage point fall in Australian export growth (Treasury, RBA modelling). Trade integration has tightened synchronisation: trade-intensive country pairs have more correlated cycles.

Cross-border capital flows transmit financial shocks rapidly. A US Federal Reserve rate hike tightens global liquidity, raises borrowing costs in emerging markets, and triggers capital outflows. The 2013 "taper tantrum" saw emerging market currencies fall sharply on a US Fed announcement.

Global value chains (about 80 percent of world trade is intermediated by TNCs in GVCs) propagate production shocks. The 2011 Japanese tsunami disrupted automotive production worldwide. The 2020 COVID-19 supply chain shutdown rippled through every manufacturing sector.

When major central banks and finance ministries respond simultaneously (G20 Pittsburgh stimulus 2009, coordinated COVID-19 fiscal packages 2020), they amplify the global response and synchronise recoveries.

Consumer and business sentiment is shaped by global news. Falls in US equity markets translate into lower confidence in Australia within hours.

Australia is more closely linked to East Asia than to Europe or Latin America. Roughly 70 percent of Australian merchandise exports go to East Asia (DFAT). Chinese demand for iron ore, coal and LNG drives Australian terms of trade and mining investment cycles.

Synchronisation is incomplete. Australia's mining-driven cycle differs from Europe's manufacturing-driven cycle.

Coordinated G20 and central bank responses are part of the cycle, not separate from it.

Use COVID-19 (2020) and post-pandemic recovery as your current case studies, with the GFC as the secondary reference.