Saved by the dollar

I WAS at a function the other night where the Treasurer, Peter Costello, sang the praises of the Howard Government in bringing in a trade surplus for the first time since John Gorton was Prime Minister.

I was tempted to ask the question what proportion of the surplus was attributable to the depreciation of the Australian dollar and how much was attributable to an actual increase in the volume of goods and services that were being exported by this country.

AMP Henderson Global Investors chief economist Dr Shane Oliver has looked at the plight of the Aussie dollar and the angst that has been wrought throughout our economy, and also the upside of having a depreciating dollar.

As he sees it, the angst which has been caused over the past 18 months has been “not least amongst economists who once again have egg spattered all over their wide-off-the-mark currency forecasts”. Some commentators out there have seen the depreciation of the dollar as proof that Australia will be a victim of globalisation, as capital is sucked from marginal countries like Australia into the US.

But Dr Oliver is quick to point out that, while the $A has probably overshot on the downside, it has done exactly what the freely floating $A is supposed to do. That is, smoothing out the impact of fluctuations in the global growth cycle on the Australian economy.

Dr Oliver says it is clear that the fall in the $A has been a major factor protecting us from the economic slump that is certainly now engulfing the rest of the world. Due to the fall in the dollar’s value we have seen export earnings up more than 15 per cent over the past year and exports appear to be holding up reasonably well to the US and Japan, although they are weaker to the rest of Asia.

The other upside of the fall in value of the $A is that it has meant that commodity prices in $A terms have risen strongly, despite weak $US commodity prices generally.

The question of intrigue to me, at the moment, is where the trading position would be now had we had a dollar with a fixed exchange rate against the US, as we did before 1983. The answer could well be “in a recession”.

The other aspect of the trade position that Dr Oliver highlights is the structural improvement that seems to be occurring in the Current Account Deficit. It seems that the combination of a strong growth rate in our exports at a time when imports have been weakened by soft domestic demand has resulted in the current account deficit, as a proportion of GDP, moving to its lowest level in 20 years.

The competitive boost to our exports has been accompanied by an expanding role of manufacturing and services exports. In the mid-1980s, manufact-uring and services exports accounted for 30 per cent of total exports. It is now at 50 per cent

The famous “Banana Republic” statement from then Treasurer, Paul Keating was made to highlight the fact that the Current Account Deficit had risen to over 5 per cent of our GDP. In fact, over the past 20 years it has averaged 4.75 per cent of GDP. Dr Oliver considers that this may well drop to around 2-3 per cent or even less over the next decade.

The fact of a lower dollar is usually associated with a decline in living standards. The higher cost of imports can also flow through to a higher rate of inflation. This has been negligible in this country largely as a result of the RBA’s handling of interest rates.

If you took out the impact of the GST from the inflation numbers you are left with core inflation in this country of 2.75 per cent. This is towards the top of the RBA band of expectations.

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