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Home > Blogs > Anthony Harrington > Australia's economy: bit of a curate's egg but way better than Europe's

Australia's economy: bit of a curate's egg but way better than Europe's

Australia's economy: bit of a curate's egg but way better than Europe's Anthony Harrington

The Aussies were cock-a-hoop when their currency, the Australian dollar first achieved parity with the US dollar and then, in July 2011 hit an all-time high of 1.1000 on the spot FX market against the US dollar. For much of 2012 the Aussie ranged between 1.02 and 1.05 against the $US, then from April to June 2013 it went on the slide, first giving up parity and then reaching a low of 0.91485 cents to the $US on Friday 28/06, with further lows likely. Just for the record, the all time low for the Aussie against the $US was 0.48 in April 2001, at the height of the crash. So what does the present rather steep decline in the Aussie tell us about the Australian economy?

The first point to note, perhaps, is that in the context of the undeclared but vigorous currency wars that appear to be raging at present, with major trading nations engaged in a competitive race to devalue their currencies to gain an exporting edge, a depreciating currency is rather a sought-after state of affairs, even if no one admits it. Australia is an exporting nation, so its currency becoming cheaper and therefore more attractive to its trading partners is a fair wind indeed. Australian pride in having a "superior" currency to the US dollar - the global currency of choice, with the $US being the deepest pool of liquidity on the planet - was in fact a fairly trivial thing, by comparison with the stakes at play in the global export game.

In fact in one of its "insight" pieces Goldman Sachs sums up the recent turbulence in the Aussie by saying that Australia has macroeconomic problems that the US and much of Europe can only dream of. They point out that the Aussie trade weighted index is at 1.5x standard deviations above its ten-year average. However, the Aussie is inescapably a cyclical currency and with the wheel being turned by continuing problems in Europe and slower than expected growth in China, with fears of a reduction in Australian exports of industrial metals to China, the current phase of the Aussie's cycle is down. The Bank of Australia has taken steps to counter any slowdown by announcing a (very modest) 50 basis point cut in interest rates in early May, with policy rates now at 3.75%, and the Australian government plans to run a budget surplus in 2013.

However, there is no inflationary threat. At the end of May the rate of inflation was just 1.6% while JP Morgan reckons that Australian GDP for 2012 will turn ot to be around 3% when all the figures are in, vastly better than the contracting economies of Europe and the near zero growth of the UK. As Greg Jerico, writing in the UK Guardian notes, although Australia came out of the 2008 crash in very much better shape than Europe or the US, the Australian Stock Exchange experienced a fall of 50% of its value between December 2007 and June 2009 and is still 25% below the highs of 2007. Moreover, Jerico points out that Australia is hugely reliant on China as its major export market for minerals and commodities generally, but Europe, China's biggest export market, has experienced a contracting economy for six quarters in a row, which goes a good bit of the way to explaining China's slowdown - which in turn has to impact Australia.

However, writing at the end of May Jerico argued that sovereign bond yields on Australian government debt are going down, not up, which means that investors aren't fussed about any impending problems for the economy. But by the end of June the outlook was less clear. Bloomberg's chart for Australian 10 year debt shows the yield spiking up 100 or so basis points, from a low of 3% to a fraction over 4% before coming back down to around 3.5%, an indication that investors are starting to see a cloud or two on the horizon. The backdrop for this rise, however, is partially given by a general market dip across European and US markets following the June Federal Open Market Committee (FOMC) meeting, where Bernanke reiterated the Fed's intention to taper off QE as the US economy picks up. This is a global, rather than an Australian, phenomenon so one could argue it still leaves the Australian economy in a rather good place, relatively speaking - certainly the UK and Europe would love to have Australia's problems...

Further reading on Australia and Asia Pacific:

Tags: Australia , Australian dollar , Ben Bernanke , China , Goldman Sachs , US dollar
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