Deutsche Bank: The Aussie dollar will fall to 60 cents as Australia slides down the economic power list

Deutsche Bank chief economist Adam Boynton has released an interesting note highlighting the importance of the mining boom and its unwind for Australia’s place in the global purchasing power league table.

Boynton says that by comparing the value of GDP per person in US dollar terms a relative purchasing power index can be generated across the globe. In 2014 Boynton said Australia placed 5th on this basis with only “Luxembourg, Norway Qatar and Switzerland” outrankd Australia.

But we’re on a slippery slope with the IMF estimating Australia will slip to 9th this year and Boynton expecting Australia to slip to 11th in 2016 and 17th in 2017.

One of the key drivers of this slide down the rankings is Deutsche Bank’s forecast for a collapse in the Australian dollar to 65 cents in 2016 and then 60 cents in 2017. When added to subdued GDP growth the slide becomes inevitable.

But, while we are slipping down the tables Boynton says that he sees, “the decline in the AUD as an essential element of the transition away from mining activity to non-mining activity.”

That’s the point Governor Stevens made again yesterday when he said “further depreciation seems both likely and necessary, particularly given the significant declines in key commodity prices” in his statement after the Board meeting.

While a falling Aussie is generally viewed as a good thing for the economy, Boynton says that online shoppers and outbound tourists, “even though they are far removed from mining”, will suffer from the loss of purchasing power.

That’s an unfortunate side effect for some. But its also how the natural stabiliser the floating Aussie dollar plays for the economy. It’s one of the reasons we’ve gone 23 years without a recession.

Sliding down the league tables is not such a bad thing after all.

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