11 July 2013 A lower Aussie dollar is not all bad news

I’ve been interested in the commentary about the Aussie dollar’s loss of value against the US dollar.

At the start of May, one Australian dollar could buy $1.05 American; this week it was down to buying US.93¢.

The portents have all seemed grim, but what does the Australian dollar actually mean?

For starters, the relative value of our currency is not always a bellwether on how we are doing as a nation.

In June 1998, Australia’s economy was growing at 3.9% and John Howard called us the 'strongman' of Asia, yet the Aussie dollar could only buy US.58¢.

In mid-June 2006, the Aussie dollar traded at US.73¢ during a time when the government had surpluses, unemployment was low and we had an equities boom.

What lifted the value of Australian dollar above US$1.00 from late 2010 to May of this year was our trade performance relative to the US economy: resources were being exported in large quantities and at high prices at a time when the US economy was flat.

For most readers this phase meant significant purchasing power when traveling overseas and very good terms from online American retailers.

But life isn’t all about cheap holidays and cut-price Nikons. Our manufacturing sector suffered under a high dollar because it was cheaper for Australians to source goods overseas, while local companies found it hard to export because the exchange rate favourable to Australia made the goods expensive for the importing nations.

Over the past two years we saw a ‘two speed’ economy, where resource exporters could thrive regardless of the high Aussie dollar because what they were exporting was in high demand, while local manufacturers went backwards.

Our domestic energy consumption has flattened due in part to manufacturers operating at under-capacity or going out of business during this phase.

Now that the Aussie dollar is buying less than one American dollar perhaps we should remind ourselves why it is not so bad for our local manufacturing, hospitality and tourism.

With a weakening dollar, Australia looks like a reasonably-priced destination for international tourists and a place where Aussies will holiday rather than going overseas. This also gives the tourism ancillaries – cafes, pubs, restaurants and accommodation – a boost.

These industries are not to be trifled with: the services economy is larger than mining, contributing to around 70% of our GDP and about 75% of employment.

And with the Aussie dollar not so high, Australian manufacturers – many of whom operate at a quality and price premium compared to Asian competition – can find opportunities again where the high dollar is not a hindrance.

There is an argument that the resources boom was actually a market distortion, and that a strong dollar and repressed manufacturing was the price to pay.

Now that the resources boom is passing, perhaps the accompanying lower Aussie dollar is better for a much larger slice of the economy than the high dollar was aiding.

Reproduced in full with permission: Property Observer A lower Aussie dollar isn't all bad news 17 June 2013

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