The Australian dollar is at 0.8760 this morning.
That’s just a cent or so higher than the low for the year, and only two and a half cents from the level in the mid 80s which RBA Governor Stevens flagged in 2013 as the appropriate place for the Aussie dollar to settle.
So the positive effects of the Aussie dollar’s fall on the economy, from an average around 103 in 2011, 2012 and early 2013 to the low 90 cent region since early 2013 and now trading below 90 cents, should be apparent on the economy. Likewise the RBA should be happy, or at least happier.
But in the minutes of this month’s RBA board meeting, released on Tuesday, the RBA continued to say:
Despite the easing in financial conditions associated with the depreciation of the Australian dollar, the exchange rate remained high by historical standards – particularly given recent declines in key commodity prices – and was offering less assistance than would normally be expected in achieving balanced growth in the economy
That’s central bank speak for: The Aussie still needs to head substantially lower.
We thought that a bit weird given where the Aussie dollar sits presently so Business Insider asked Peter Jolly, NAB’s global head of research, what gives.
Somewhat scarily, Jolly echoed the same themes we have heard this week from the CBA’s Tim Rocks and the Deutsche Bank equity strategy team about cost cutting in Australian businesses.
Jolly said that he expects the “the theme of efficiency and productivity” will continue for some time and highlighted that:
The US economic recovery has also been largely bottom-line led. The S&P 500 companies are making record profits against the backdrop of modest growth in employment, wages and capital expenditures. We are perhaps seeing a change to this in 2014, with US jobs growth consistently better and wages starting to edge up – a key change has been that small business finally look to be emerging from recession.
Locally the NAB’s business liaisons, “tell us that firms are still being conservative about their hiring decisions as well as their investment plans,” Jolly said. He highlighted that there is “a lot of business model uncertainty due to disruptive technologies and globalisation as well as some political uncertainty and increased regulation.”
“But perhaps the key reason is the lack of top-line growth. When asked what the biggest constraint on their profitability is, 51% of firms in today’s Q3 NAB Business Survey cited a lack of demand,” he said.
Thus, firms are looking for efficiencies, “doing the same with less – as opposed to doing more with the same when revenues are growing,” which means that consequences show up in labour market weakness and unemployment at decade highs.
But Jolly said the Aussie dollar also has a big part to play in the adjustment to global competitiveness for Australian business unless demand picks up again.
A lower nominal $A exchange rate would be a great and immediate assistance and if we don’t get that then we will have a real exchange rate adjustment lower via lower wages and increased productivity.
That’s economist speak for: If the Aussie doesn’t fall a lot further workers need to pay the price.
It seems Australian workers might need to give up cheap holidays and internet shopping if they want to keep their jobs, let alone get pay rises. It also means “the unemployment rate is likely to remain between 6-6½% over the next year or so,” Jolly said.