A continuing fall in the Australian dollar could turbocharge the economy

Rusty Jarrett/Getty Images
  • The Australian dollar has fallen over 12% against the greenback, and by 8% in trade-weighted terms, since late January.
  • Macquarie Bank says the decline, if sustained, could add 1-1.75 percentage points (ppts) to Australian economic growth over two to three years.
  • It could also boost export revenues, and inflationary pressures.

Australia’s economy is growing at the fastest pace in nearly six years.

While few expect that will be sustained in the quarters ahead, the economy may be about to receive yet another growth tailwind from a somewhat unexpected source: the lower Australian dollar.

It’s been pummeled over the past eight months, losing over 12% against the greenback and around 8% in trade-weighted terms, leaving it at the lowest level in over two years.

Some suspect it will go even lower in the period ahead.

Although not everyone will welcome the Aussie’s sharp and somewhat sudden decline, particularly among those planning to holiday overseas, as Macquarie Bank’s Australian economics team explains, it’s likely to be welcomed by those who want to see faster GDP growth, including policymakers in Canberra and at the RBA.

“The lower currency, if sustained, is likely to provide net stimulus to the economy,” says Justin Fabo and Ric Deverell, Economists at Macquarie.

“All else equal, a permanent 10% real Australian dollar depreciation would typically boost Australia’s GDP growth by a cumulative 1-1.75 percentage points (ppts) over two to three years… [with] the peak impact on growth in the initial couple of quarters.”

So, based on Macquarie’s estimates, should the Australian dollar remain or add to its recent declines, it could boost GDP growth quite significantly, especially in the near-term.

It says the transmission mechanism will come primarily from trade, an area that has already contributed significantly to Australian economic growth in the first half of the year.

In particular, they say the largest tailwinds could come from more expensive imports.

“When the AUD depreciates, Australians buy relatively fewer imports of goods and services as they become relatively more expensive. This shifts domestic demand towards domestically produced output and is the fastest channel of support to the economy as the currency weakens,” says Fabo and Deverell.

And while imports become less attractive from a cost perspective, Australian exports become more attractive to those overseas, especially for services such as tourism and manufactured goods.

“While Australia’s rural and commodity export volumes are largely supply determined and show little response to currency movements, services exports and manufactured goods exports show some boost from a lower currency,” says Fabo and Deverell.

They also note that the lower currency will help boost export revenues with more than two-fifths of Australia’s non-resource exports invoiced in currencies other than Australian dollars.

The net trade impact of Macquarie’s estimates on trade can be seen in the chart below, including that much of the expected benefit occurs in the immediate quarter after a 10% decline in the Aussie.

Macquarie Bank

Along with helping to boost GDP growth, the lower Aussie could also help to lift inflationary pressures, something the RBA has been struggling to muster over the past few years.

According to its own estimates, a permanent 10% decline in the AUD typically results in underlying inflation being 0.25 to 0.5ppts higher over two to three years that what would otherwise be the case.

Faster economic growth, higher inflation and greater export revenues, all potentially arriving from a lower Aussie dollar.

Safe to say, while not everyone will be cheering the Aussie’s slide, it’s a good bet policymakers are.

NOW WATCH: Money & Markets videos

Business Insider Emails & Alerts

Site highlights each day to your inbox.

Follow Business Insider Australia on Facebook, Twitter, LinkedIn, and Instagram.