- It’s now been over 27 years since Australia’s last recession. The floating Australian dollar has been a big factor in this impressive run of continued economic expansion.
- HSBC says the weaker Aussie dollar this year is working its magic for the economy once again, helping to boost Australia’s trade-exposed sectors, national incomes, as well as inflationary pressures. It says the RBA will be pleased with recent events, and says the bank will start to lift official interest rates in the June quarter of 2019.
- It forecasts the AUD/USD will bottom out at .6800, down from .7080 at present.
It’s now been over 27 years since Australia’s last recession.
While China’s rise to economic prominence and, more recently, stronger population growth, has contributed to this envious run of continued economic expansion, perhaps unprecedented for a developed economy depending on who you ask, prior reforms have also played a crucial role, including the floating of the Australian dollar in late 1983.
Time and again, the floating Aussie dollar has worked its magic for the Australian economy, helping to restrain activity when the economy is doing well and support growth when it’s not.
The Aussie’s recent fall, seeing it decline 6% in trade-weighted terms and more than double that amount against the greenback since the beginning of the year, is simply a continuation of that theme, helping to support Australia’s trade exposed sectors following a period of broader economic weakness in prior years, says Paul Bloxham, Chief Australia and new Zealand Economist at HSBC.
“The floating AUD has long been Australia’s most powerful economic shock absorber, and it deserves a lot of the credit for the long boom,” Bloxham says.
“It’s been a long time coming, but the widening interest rate differential with the US appears to finally be doing what the RBA is likely to have hoped it would do: push the AUD lower.”
While not everyone will be cheering on the Aussie’s fall, especially those relying upon it to pay for overseas investments and holidays, Bloxham says the RBA will be happy with recent events given it will likely provide tailwinds for faster economic growth, higher national incomes and stronger inflationary pressures in the period ahead.
“[The weaker Aussie] should support local growth and inflation,” Bloxham says, adding that it could be particularly potent on this occasion given the falls are largely reflective of US dollar strength rather than economic weakness in Australia.
“A general rule of thumb for Australia suggest that a 5% fall in the exchange rate is about equivalent to the effect of a 25basis point RBA rate cut,” he says.
“Importantly, if the current AUD sell-off mostly reflects USD strength, which it appears to, rather than local economic weakness, this should bolster the impact that the depreciation has on growth.”
Especially at a time when Australia’s key commodity export prices are climbing higher, something Bloxham says should act to boost national incomes and, potentially, worker wages.
“The effect should be particularly powerful because it is happening at a time when commodity prices are rising. This boosts national incomes,” he says, noting the average price of Australia’s commodity basket is currently at the highest level since early 2014 when measured in local currency terms.
Along with supporting services exports such as tourism and education, by increasing the cost of imports, the weaker Aussie is likely to lift tradable inflation, an outcome that Bloxham says will be welcomed by the RBA given underlying inflation has failed to move back to the midpoint of its 2-3% target for several years.
It should also help to limit demand for imports, potentially helping to support local businesses and with it the broader economy.
HSBC expects the AUD/USD will continue to slide in the months ahead, forecasting that it will bottom out at .6800, down from its present trading level of .7080.
Given the prospect of firmer economic growth and a lift in inflationary pressures, Bloxham says this will have ramifications on the outlook for official interest rate settings from the RBA: he thinks the bank will lift its cash rate far sooner than what many expect.
“Our central case is that the RBA begins to normalise its policy setting from around mid-2019,” he says.
Financial markets currently put the odds of a 25 basis point increase in the RBA cash rate by the end of next year at less than 50%.
While Bloxham is well-renowned for being a hawkish forecaster, few will disagree that the weaker Aussie dollar, on balance, is helping to support the Australian economy at present.
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