Falling dollar reflects global concern all is not well in the Australian economy

Mon, 07 Jan 2019  |  

The article first appeared on The Guardian website at this link: https://www.theguardian.com/business/2019/jan/03/falling-dollar-reflects-global-concern-all-is-not-well-in-the-australian-economy 

--------------------------------------------------------- 

Falling dollar reflects global concern all is not well in the Australian economy

The Australian dollar was hit hard overnight, Australian time, slumping below 70 US cents before a sharp and more extreme move saw it temporarily crash to a low of 67.40 US cents. It subsequently recovered marginally, but remains weak at around 69.40 US cents.

Rather than focus on the micro aspects of minute-by-minute or hour-by-hour moves in the dollar, which can be more noise than substance, the trend for the dollar over the past year has been down.

In January 2018, the Australian dollar was trading at 81.50 US cents.

There is increasing concern from global investors that all is not well with the Australian economy. Policy is in a do-nothing phase. Entrenched low wages growth is hampering growth in household spending. This is being complemented, in a negative way, by a sharp fall in wealth as house prices drop and the share market weakens, both of which will be a negative for the economy during 2019. This is because householders are simply not getting the income growth nor wealth accumulation needed to allow them to keep spending at a rate that will see the economy expand at a pace that will generate upside wage and inflation momentum. Strategies aimed at reducing debt and paring back new borrowings mean, by definition, weaker economic growth over the near term.

The rosy forecasts from the Reserve Bank of Australia and Treasury published just last month are a pipe dream. Investors know this and are selling Australian dollars and buying government bonds as a result. No credible forecaster believes the RBA’s growth and wages forecasts. This assessment has driven an about-face in market expectations for official interest rates.

Investors and the market are treating the RBA forecasts and rhetoric – that “the next move in the cash rate is more likely to be an increase than a decrease” – with disdain. Interest rate futures are pricing in the strong possibility of an interest rate cut in late 2019 or early 2020, with the economic growth deceleration, problems with wages and the failure of the RBA to meet its inflation target as primary reasons. A slowing in global growth is also impacting.

If the RBA is to deliver a decent and sustained trend rate of economic growth – that is one that will underpin an economy that will deliver an improved and tighter labour market that in turn drives an acceleration in inflation back to the mid-point of its target range – lower interest rates are needed.

The RBA board next meets on 5 February, and if it is to maintain a semblance of credibility, it will drop its rose-coloured view of the local economy and acknowledge the downside momentum unfolding before its eyes. It will need to flag the need for easier policy. The dollar is set to take another hit on the back of this change in official view.

Also impacting the value of the Australian dollar are the increasing weighty problems in the Chinese economy. China takes around one-third of Australia’s merchandise exports, which makes it a vital part of any assessment of the economy and the Australian dollar. Chinese economic growth has slowed to its weakest pace in two decades and a further slowing in 2019 is assured. The trade and tariff war with the US is undermining the manufacturing sector and to the extent the major buyers of Chinese goods are also experiencing a stalling in growth, the global outlook has taken a turn to the downside.

The economies of the US, eurozone and Japan are also slowing and registering worryingly low inflation, particularly in the context of how stimulatory monetary policy has been for a decade or more. The Bank of Japan and the European Central Bank are keeping monetary policy tilted towards extreme stimulus, notwithstanding occasional rhetorical flourishes from some of the more hawkish members of each institution.

Even the US Federal Reserve, which has hiked its interest rates to 2.5% over the past two years, is poised to pause its rate-hiking cycle. It could even reverse some of those interest rate hikes later this year as the US economy enters a period of more problematic growth and severe budget problems.

In simple terms, the Australian dollar tends to be strong when the global economy and local economic growth is strong, and it tends to fall in times of economic weakness. What we are witnessing now is no different from this well-established trend.

The 10c decline in the Australian dollar over the course of the past year is well within the range of normal moves seen since it was floated in 1983.

Given the unfolding slump in housing, the labour market, global growth and the major commodity price indices, we might see something close to another 10c decline in the Australian dollar over the year ahead.

 

comments powered by Disqus

THE LATEST FROM THE KOUK

The misplaced objective of the government of delivering a surplus, come hell or high water, has gone up in smoke

Tue, 07 Jan 2020

This article first appeared on the Yahoo Finance web site at this link: https://au.finance.yahoo.com/news/the-governments-test-in-2020-220310427.html   

---------------------------- 

The misplaced objective of the government of delivering a surplus, come hell or high water, has gone up in smoke

For many people, the cost of the fires is immeasurable. 

Or irrelevant. 

They have lost loved ones, precious possessions, businesses and dreams and for these people, what lies ahead is bleak.

Life has changed forever.

As the fires continue to ravage through huge tracts of land, destroying yet more houses, more property, incinerating livestock herds, hundreds of millions of wildlife, birds and burning millions of hectares of forests, it is important to think about the plans for what lies ahead.

The rebuilding task will be huge.

Several thousands of houses, commercial buildings and infrastructure will require billions of dollars and thousands of workers to rebuild. Then there are the furniture and fittings for these buildings – carpets, fridges, washing machines, clothes, lounges, dining tables, TVs and the like will be purchased to restock.

Then there are the thousands of cars and other machinery and equipment that will need to be replaced. 

What's ahead for the Australian economy and markets in 2020

Thu, 02 Jan 2020

What's ahead for the Australian economy and markets in 2020

Happy New Year!

2020 will be a year where Australia’s annual GDP will exceed $2 trillion, our population will get very close to 26 million people and we will clock up 29 years with no recession.

It is also a year where the economy will be a dominant issue for policy makers, will drive what happens to interest rates, will help drive investment returns and will feed into the well-being of the Australian community. 

2020 kicks off with relatively good news in terms of economic growth, even though the labour market is likely to remain weak, with wages growth struggling to lift and inflation remaining below the RBA’s 2 to 3 per cent target. The Reserve Bank may have one more interest rate cut in its kit bag, but by year end, the market is likely to price in interest rate increases, albeit modestly.

The ASX, which had a great 2019 is set to be flatten out, in part driven by the change in the interest rate outlook, but it should get a boost from better news on housing and household spending.

In terms of the specifics, I have broken down the 2020 outlook into a range of categories and given a broad explanation on the issues underpinning the themes outlined.

GDP Growth

It’s a positive outlook. A pick-up in GDP growth from the current 1.7 per cent annual rate is unfolding, with the only real issue is the extent of the acceleration.