The RBA has been talking down the Aussie dollar for the best part of 18 months now. Last week, trading under 76 cents for the first time since 2009, the Aussie came within striking distance of the 75-cent level RBA governor Stevens said last year was more appropriate.
Alex Joiner, Bank of America Merril Lynch economist, says that the fall in the Aussie dollar is going to continue, with the bank setting a target of 73 cents for the end of 2015 and 68 cents for the end of 2016.
That doesn’t seem too far from where we are now but as Joiner notes, the 68 cent level is:
US$8 cents below the post float average of US$0.7600, but more importantly US$42 cents lower than the US$1.1014 peak recorded in July 2011. This move should be of significant relief to long-suffering exporters and an increasingly unwelcome impost to importers.
This is good news as the RBA and Australian business needs the Aussie dollar to play its role as Australia’s natural economic stabiliser, rising to restrain growth and falling to encourage domestic growth. Quantifying the economic benefits, Joiner highlights RBA research which says that 10% fall in the Aussie if it becomes “permanent”, as seems the case at the moment, will “add around 1% to GDP after two years”.
Of course there are winners and losers from the Aussie falls but Joiner highlights that Service exports are on the rise, up 9% in volume terms since late 2012> “This growth has accelerated as the A$ has moved lower,” Joiner says.
He added that the signing of the Free Trade Agreements with Japan, Korea and in particularly China, would be a boon for Australia’s services exports.
But Joiner noted that Australian manufacturing seems to have been “hollowed out” and was still struggling, even with the lower Aussie dollar.
“Volumes of exports in this sector are actually 2.7% lower than in late 2012. And unlike services, exports have failed to recapture the level or growth experienced before the global financial crisis,” Joiner says.
Tourism and education are “best placed to take advantage of the lower Australian dollar”. International student enrolments rose 12% in 2014 while “tourist arrival numbers have accelerated since the A$ began its depreciation.” At the same time, the rate of outbound tourism departures is running at a slower rate than arrivals.
This should be a “boon” for local tourism operators with more international and domestic customers leading to more business and improved hiring.
It’s jobs where the winners and loser are most obvious. Here Joiner highlights the divergent moves across industry:
Accommodation & food services has experienced strong employment growth over the year to November, reflecting a rebound in the sector. Indeed with 4.5% yoy growth and 51,000 jobs created this sector has been responsible for over a third of the 145,600 person increase in employment over that period. By contrast, manufacturing employment has declined by 20,900 jobs over the past year with the long term downtrend, that was accelerated by the high A$, only showing tentative signs of abating. Of other sectors unsurprisingly employment in the resources has declined in line with the investment cycle retreating. Whereas that in construction and real estate services has increased as lower rates continue to spur activity in the housing sector and property market. Retail sector employment has expanded very modestly up 0.7%yoy, and we would expect this to come under increasing pressure as the lower A$ increases cost pressures.
But while the Aussie dollar is a net positive for the economy, it’s not all good news, with the big fall driving prices up meaning that many Australian businesses are facing higher costs. The question in the current environment is whether they can be passed onto customers or need to be absorbed by the businesses themselves.
All in all however, Joiner and his colleagues at BoA Merrill Lynch believe that “with significant stimulus coming from the combination of a lower oil price, the lower A$ and accommodative monetary policy the pendulum may indeed swing back to the expectation of rate hikes late in the year”.
They are now forecasting a rate hike in December to be followed up by another in the first quarter of 2016.
They acknowledge that’s a huge and out of consensus call. But if they are correct, even though rates will be rising, the Australian economy will be the winner.
It will mean the Aussie dollar has once again done its job.