Australian dollar’s strength spells bad news for domestic businesses
FROM skyrocketing rents in remote mining towns to the decline of the motor industry, Australia is grappling with the downside of world-beating economic growth that has driven the nation’s currency to record highs.
Policy makers and executives at the Bloomberg Australia Economic Summit in Sydney this week singled out the local dollar’s strength as the biggest challenge for business, while conceding there is little that can be done to restrain it.
Terry Davis, MD at Coca-Cola Amatil, said the so-called Aussie is “decimating” manufacturers, while Robert Mead, head of portfolio management in Sydney at Pacific Investment Management, said businesses are deferring spending.
Australia’s defiance of the global slowdown is now backfiring on manufacturing after the currency soared 75% against the US dollar and 87% versus the yen from its low in October 2008 after the collapse of Lehman Brothers roiled financial markets. The government and Reserve Bank of Australia say the cash flowing into the economy — fuelled by quantitative easing in the US and Japan — is beyond the control of policy makers in a small nation.
“That’s the hand that the world has dealt us,” Reserve Bank of Australia assistant governor for economics Christopher Kent said at the summit, reiterating that the central bank has no plans for intervention to weaken the Australian dollar.
“Businesses in a number of industries are under quite a deal of pressure — part of that’s because of the exchange rate.”
Treasurer Wayne Swan said the Australian dollar is “defying gravity” as commodity prices fall.
“The global economy requires the big economic engines to grow so we can all grow together, and if that requires expansionary monetary policy because fiscal policy has reached its limits or can’t be implemented, then so be it.”
Australia’s economy expanded 3.6% last year, the fastest pace in five years, while employers added 71,500 jobs in February, the most in almost 13 years, government data showed last month.
Clouding the outlook, BHP Billiton chief financial officer Graham Kerr told the conference he expects annual economic growth in China to moderate towards 6%, and that prospects in its largest customer state present the company’s main business risk.
The Australian dollar touched $1.0525 yesterday, the highest level since January 24, extending the longest stretch above parity with the US dollar since it was freely floated in 1983. The Bank’s trade-weighted index climbed to 79.9 yesterday, the highest level since 1985.
“While the Aussie dollar’s at $1.05ish, the investment decisions are being delayed,” Mr Mead said.
Mr Davis said: “The continued strength of the Australian dollar is just decimating domestic manufacturers that face strong import competition.”
General Motors’ Holden division said this week it will cut about 500 jobs in Australia, citing the local dollar’s strength, and currency devaluations in competing markets.
The central bank cut rates by 1.75 percentage points in six steps in the 14 months to end-December as policy makers try to rebalance a twospeed economy where mining regions in the north and west thrive off Chinese demand, while manufacturing and tourism in the south and east struggle. The Reserve Bank of Australia left borrowing costs unchanged at 3% this year, saying earlier reductions are gaining traction with households.
“Some of the businesses, it’s very unfortunate, but those that are not doing well and are not surviving, they go out of business,” Mr Kent said. “But new ones come in, and those that go out of business tend to be less efficient than those that they’re being replaced by, that’s the natural process through which productivity growth occurs.”
Warwick McKibbin, a former member of the Bank’s board, said the distortionary effects of monetary policy need to be taken into account. “Monetary policy can’t do everything,” said Mr McKibbin, chair in public policy at the Australian National University’s centre for applied macroeconomic analysis.
“All monetary policy does is it moves demand around through time. It doesn’t create things. When the central bank starts to cut rates too much, it distorts the economy, it distorts the allocation of capital.”
Australia’s prosperity is luring international buyers to the property market. A National Australia Bank survey of developers found that foreign buyers of new properties made up about 9% of total purchases, chief economist Alan Oster said.
In the northwest town of Port Hedland, the housing situation is very different from two decades ago. Then, houses were very hard to shift, said Mr Kerr, who was charged with selling houses in the town after he joined the Melbourne-based firm.
As mining has boomed, Prime Minister Julia Gillard’s government has not reaped electoral dividends because the opposition positioned itself as pro-resources and opposed new taxes on coal and iron-ore profits. In the manufacturing heartlands of Sydney, Melbourne and Brisbane — where Labour traces its origins and historically has been strong — growth and employment have been hampered by the dollar’s ascent.
The number of manufacturing workers, traditionally supporters of the union-financed Labour Party, has slumped 10% since Labour won office in February, the lowest since the data series began in 1984.
In western Sydney, Australia’s largest manufacturing region, unemployment in some areas is as high as 14% as iconic local companies such as sauce maker Rosella lose the battle against rising costs and cheaper imports.
At state level, Labour was ejected from office in New South Wales after 16 years in 2011, winning just 25.6% of the vote. Liberal Party Premier Barry O’Farrell told the conference he expects federal opposition leader Tony Abbott will sweep the region in the September 14 election.
“My prediction, not news breaking, is Tony Abbott is going to win the federal election in Sydney’s west with much the same margin that we won seats in March of 2011.”
Paul Howes of the Australian Workers Union said the economy’s changes are different to the removal of industry protection overseen by a Labour government in the 1980s when fallout from change was planned. Bloomberg