Why the strong A$ is bad for our economy
Categories: Uncategorized
Written By: Tom Elliott
The recent and sudden rise of the A$ vs the US$ and, to a lesser extent, the Yen and the Pound has been greeted with adulation by many commentators. Newspapers refer to our currency as the ‘Aussie Battler’ as though, like Lleyton Hewitt perhaps, it was engaged in a grueling tennis match with a more fancied and foreign opponent.
In reality, however, a surging A$ is the last thing this country needs. During the Asian financial crisis of 1997, for example, our currency fell below 50 US cents after being sold off as a proxy for the economies to our immediate North. Yet in this selling lay Australia’s salvation, for the weak A$ kept our exports ultra competitive while at the same time restricting the growth of imports. This kept local manufacturing healthy, and with it unemployment down.
Unfortunately, far too many of us forget about export performance and focus solely on the cost of potential overseas holidays when we pass judgement on the relative value of our dollar. Right now it is indeed true that a trip to the US, UK or mainland Europe is probably as chap as it’s been in decades thanks to the weakness of those countries’ currencies. And there’s nothing wrong with Australians who remember paying three of our Dollars for a single Pound (as occurred in the early 1990s) enjoying the fruits of the A$’s current strength.
Yet if our Dollar remains strong, eventually we might not be able to afford to travel long distances. Much of Australia’s prosperity depends on the export of minerals, agricultural commodities and manufactured goods. Because the prices of these are usually denominated in US$, we are not at present enjoying all the potential fruits of our success. The recent price of gold serves as an excellent example. As a major gold producer, Australia should have profited handsomely from the yellow metals run in US$ terms from $710 to$1050 per ounce since October last year. In A$ terms, however, the gold price has hardly moved in that time, and in fact has fallen substantially (from A$1500 per ounce to A$1140 per ounce) since March this year.
The main reasons our currency is rising are (a) the relative strength of our economy (undoubtedly a good thing), and (b) recent increases by the RBA in the official rate of interest (of mixed benefit to our debt laden economy). Given the negative impact the strong currency must now be having on our economy, one can only hope that the RBA might avoid lifting rates too much when it next meets on Melbourne Cup Day.
October 27th, 2009 at 4:24 pm
Seriously Tom how can you say that a surging A$ is the last thing this country needs?
Many Aussie Battlers’ I know havent had a decent holiday in several decades! And it’s about time. Last year we travelled to thailand for our first taste of Asia and had a fabulous time. We met several euro couples and families who, get this, paid next to nothing for their entire 14 or 21 day holiday as their currency was so strong (EU$1 = TB$45 - so EU$2000 = TB$90,000 with the min wage presently at 175 baht per day). Our 11 night package cost us several months of savings and while not complaining about it, we could now afford a more decent (and well overdue) holiday because the Aussie Battler has finally shown its strength on the world stage.
The idea that exports are always going to save us is ridiculous. We have loads of potential yet to develop, particularly the next stage of controlled eco-tourism, a burgeoning and highly creative IT sector, media, entertainment, arts and a zillion gigatonnes of yet to be mined natural resources.
We could, if the government bothered to support us, develop superior energy alternatives (solar, wind, biofuels etc) and draw countless additional billions by providing most of the world with water (from the Ord River).
The future is upon us Tom and unless we see a clear path beyond the usual hedging of the dollar and digging up the dirt, then I guess we will be swept up with the next storm and carried to a destination we may regret.
I do believe however, that the world will now have to recognise Australia as a nation which can pave its own way during an economic calamity; perhaps even survivng a next global meltdown due to our inimitable ability to roll up our sleeves and work together as a team. Beyond that, we could probably even remain entirely self sufficient for many decades. Maybe the rest of the world sees this potential? Maybe some are jealous of what we have and what we are as a culture? Perhaps that’s part of the reason why they’re all trying to feverishly buy up as much as the FIRB will allow them to?
I’m tired of hearing about how our only hope for prosperity depends on the export of minerals, agricultural commodities and manufactured goods. I recall when we were all living off the sheep’s back!
All I read about is how a few Australian’s are (again) getting fat off the land and when you think about it, it’s a pretty easy model! Once you have a few spare million, you just purchase more mining tenements and sell them at a massive profit. Sure, it probably is the next boom industry, creating jobs and securing lives, but at what cost to the other 95% of Australians who are not in that sector?
If we truly are the lucky country then it’s about time we set a trend and showed what other talents and abilities and means for generating money we have. As I said, the reliance on what lies beneath is really only a benefit to a small percentage of the whole. In fact, it may be the next gold rush yet as we all know, a gold rush in any terms just elevates ego’s and tempts greed.
From here, I propose that our best plan is to redesign ourselves as the Clever Country. Otherwise we may just be left eating the dust while most of our AsiaPac neighbours surpass us in the intellectual stakes.
Just watch this:
http://www.youtube.com/watch?v=jpEnFwiqdx8
October 27th, 2009 at 7:40 pm
Dear Tom.
I listen to you on Neil Mitchell’s 3AW programme and thoroughly enjoy your conversations with Neil.
Now I am a fellow Carton supporter, but I do not think you great father would be
happy with your spelling mistake in your article as follows:
“Right now it is indeed true that a trip to the US, UK or mainland Europe is probably as chap as it’s been in decades thanks to the weakness of those countries’ currencies.”
I think you meant to type the word “cheap” but have accidentially typed chap in your sentence.
Anyway, a very excellent article, with lots of “Food For Thought”.
Take care always.
Regards Greg
Melton South
Victoria, 3338
October 28th, 2009 at 7:23 am
Another excellent summation Tom. Unfortunately the RBA will have no choice but to increase interest rates to take some heat out of the economy.Property prices keep increasing at an alarming rate as demand continues to exceed supply.I would rather be in our position than the US economy which is in real trouble and will remain so for a few more years.How much more debt can they take without the bottom falling out of the US dollar???
October 28th, 2009 at 8:16 am
Hi Greg
I’m not sure you realise it, but tourism is an export! and it’s hard for Australia to be an eco tourist destination due to the distance people have to travel to get here, ie using jet aircraft. Any tourist operator will tell you that the high A$ is killing demand by inbound travellers.
The same goes for IT and other creative exports - a high currency reduces their worth (to us) on the world stage. For example, global film makers are now turining away from Australia as a place to make movies due to its relatively high production costs (again largely a function of the currency).
As to ‘battlers’ taking overseas holidays, I’m all for it. I’m simply pointing out that given a choice between a weak A$/strong economy or a strong A$/weak economy, I know which I’d choose.
Finally, I agree with you about Australia needing to redesign itself as the ‘clever country’. This will require a massive extra investment in education plus a commitment to high standards in the secondary and tertiary sectors. Neither of these alternatives appears to be a priority of Govt right now.
Regards
Tom
October 28th, 2009 at 8:19 am
Hi Jay
The future of both American debt levels (public and private) and the US$ is indeed most murky. One point, however, for those who predict the US$’s demise as a global currency - with what will it be replaced? The Euro is unlikely as Europe lacks a strong central govt. China is a possibility, but probably not while its currency is managed rather than allowed to float freely on global exchanges.
Regards
Tom
October 28th, 2009 at 10:59 am
Greg’s comments are typical of what we keep hearing, as Tom explains.
However, as someone who derives a substantial portion of my income in $US, the difference to me is that a higher $AU significantly reduces my quality of life and my ability to house and feed myself.
Most discussion revolves around discretionary spending, like holidays - you get more bang for your buck, which is great of course. However you have the option of making do with less or deferring altogether.
Income is never discretionary, whether its on an individual or industry level.
Industries who have to purchase from O/S for their end product can make up for currency fluctuations in their selling prices, although prices never seem to actually fall. However, I can’t pay less rent because my earnings have fallen by a third thanks to the Aussie Battler. Its more like the Aussie Crippler.
October 28th, 2009 at 1:03 pm
Just sell all our exports in Chinese RMB - its where most of our exports go anyway.
October 29th, 2009 at 12:34 pm
We are a small IT company. We create and sell software. To be competitive our software is priced in US dollars, and 95% + of our sales are exports (mainly to the US and UK).
The rise in the Australian dollar has seriously hurt us (especially since our level of sales has not fully recovered due to the weaker US and UK economies).
I have had to put off one part time worker, and that has resulted in us having to shelve plans for new products for next year. New products are always risky, you don’t know how well they will sell. But when I convert expected sales using these kinds of exchange rates, it is hard to make the case to take the risk and spend six months working on an app.
A couple of weeks ago, I read an article in the SMH by Ross Gittins saying that we should expect high exchange rates for the next three decades. Ever since, I have started pondering the idea of moving myself and the company overseas. Either that, or I find a job selling the now extra cheap imported flatscreen TVs
October 30th, 2009 at 10:15 am
Hi Steve, Mave and Michael
Your experience suffering from the high A$ is certianly not unique, as many export oriented firms are undergoing the same problems. FX mkts are notoriously difficult to predict, so I wouldn’t pay too much attention to RG’s three decade forecast - no one can see this far ahead! Just remember that last year when our dollar approached parity with the US one, it subsequently fell away rapidly.
As to pricing exports in Chinese RMB - this may be closer than you think. The big issue here is when the Chinese Govt allows its currency to float freely. Once this occurs, it’ll become far more prevalent on world exchanges.
Regards
Tom