The IMF neatly explains why the falling Australian dollar is great for the economy

Photo by Dean Treml/Red Bull via Getty Images

The IMF released “Analytical” chapters 2 and 3 of the upcoming October World Economic Outlook last night. Chapter 2 looked at the outlook for commodity exporting countries, with the report saying “the weak commodity price outlook could subtract almost 1 percentage point annually from the growth rate of commodity exporters over 2015–17 as compared with 2012–14.”

The IMF also said the downturn in prices “is not just a cyclical phenomenon; it has a structural component as well.” This impacts investment and potential growth as Australia knows all too well.

While chapter 2 seems to spell doom and gloom for the Australian economy, chapter 3 not only highlights why the RBA wanted to get the Aussie dollar lower, but how the structure of the Australian economy means Australia stands as one of the primary beneficiaries of a depreciating exchange rate.

The IMF said: “Recent currency movements thus imply a substantial redistribution of real net exports across economies.”

The IMF went on to say that “among economies experiencing currency depreciation, the rise in exports is likely to be greatest for those with slack in the domestic economy and with financial systems operating normally.”

That sounds very much like the position Australia has found itself in recently. It also accords with RBA research, which shows that a sustained 10% fall in the Australian Dollar drives growth 1% higher two years later.

With forecasts for further falls and little prospect for rising inflation in Australia both this IMF report and the RBA’s own analysis show just how important the falling Australian dollar has been for growth, both now and in the years ahead.

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