Dollar’s big drop could save us from recession
DOLLAR has become a dirty word for many people planning to take an overseas holiday soon.
The dramatic descent of the Australian dollar over the past month – from almost US98.5c to US85c – has severely dented their buying power on several continents.
However, the slumping currency could be a key factor in preventing Australia from following much of the Western world into recession.
“For the economy as a whole it’s good news, even though it’s bad news for travellers,” says AMP Capital Investors chief economist Shane Oliver.
Just over a month ago many economists were predicting our currency was about to reach parity – where one Aussie dollar buys one American dollar.
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Now there are predictions for it to fall further in the short term, down to about US80c. Yesterday the Aussie dollar was buying US85.4c.
So what has caused such a sharp U-turn?
Firstly, the Reserve Bank of Australia has been making serious noises about lowering the official interest rate, with its first cut expected today. Second, commodity prices such as oil and base metals have dropped heavily amid fears of global economic slowdown.
“The Australian dollar is still seen as a commodity currency,” Dr Oliver says.
Third, the US dollar has bounced back against most other countries’ currencies in recent weeks.
These factors have combined to force the Aussie dollar to a seven-month low, although it should be put into perspective. A US85c exchange rate is still much stronger than the levels below US50c it hit in 2001, back when it earned itself nicknames such as “Pacific peso” and “little Aussie bleeder”.
While overseas travellers might wish to protest, the latest drop in the dollar creates more winners than losers.
“At US98.5c it was bad for the competitiveness of Australian companies,” Dr Oliver says. Now, exporters will find customers can better afford their goods.
Farmers will get more money for their crops, miners will get more money for their metals, and even local tourism operators will find their sector becomes more attractive to foreigners as travel to Australia becomes more affordable.
Just as Aussies heading offshore have lost up to 15 per cent of their purchasing power in a month, many travellers coming to Australia now get 15 per cent more.
Prescott Securities chief economist Darryl Gobbett says wine exporters and motor vehicle manufacturers will also benefit from the local currency’s fall.
“A lot of exporters would be pretty happy about it,” he says. With businesses benefiting from these improved terms of trade and being less likely to slash jobs, the risk of Australia sliding into recession is reduced.
But AMP’s Dr Oliver says we are not out of the recession woods yet.
He still thinks there is a 40 per cent chance of Australia going into recession, up from a 20 per cent chance at the start of the year but less of a chance than it would have been had the Reserve Bank not suggested that interest rate cuts are on the way.
“The Reserve Bank has started to head off the risk,” he says. “Lower interest rates will certainly help, but they haven’t improved in the US, UK and Canada.
“There is still a risk. At last count there were 12 significant economies around the world that have recorded negative gross domestic product (GDP) growth in the March and June quarter.”
Australia’s annual economic growth has slowed sharply from 4 per cent, and figures due out tomorrow are expected to show just 0.3 per cent GDP growth for the June quarter and an annual rate of 2.8 per cent.
“We are probably on the way to about one or 1.5 per cent over the next 12 months,” Dr Oliver says.
“Obviously the mining sector is still keeping us afloat. The consumer side already seems to be in recession.”
Mr Gobbett is more confident that Australia will avoid a recession.
“I don’t think too many economists would see a classic recession of two quarters of negative growth,” he says.
“Most see the economy growing in 2008-09 at 2-3 per cent.” He points to a “huge” pipeline of infrastructure development in Australia.
“There’s probably 12 to 15 desalination plants built over the next year or so,” he says.
“Some commodity prices have taken a hit but copper prices are still quite strong and a lot of the big commodities – iron ore and coal – are staying quite strong.”
The commodity story, driven by surging demand from China, which still has growth rates three and four times bigger than Australia, is expected to continue to be a positive one and is a key factor why many economists expect the long term trajectory of the Australian dollar is upward.
“The currency likely has more downside ahead of it over the next six months or so, possibly to around US80c,” Dr Oliver says.
“However, the long-term trend in the Australian dollar is likely to remain up in response to the long-term rising trend in commodity prices.”
With more short-term weakness tipped, there are two messages for would-be overseas travellers. Number one, be thankful it’s not 2001.
Number two, remember that not every country’s currency is based on the U.S. dollar. Large parts of Asia and Africa – and of course America – are, but Britain is not.
The British pound is currently at a two-year low against the U.S. dollar and 47 pence against the Aussie as it flirts with its own recession.
A holiday in the Old Dart is becoming more attractive by the day.
news.com.au
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