Here is this month’s regular Q&A column contributed by Greg McKenna, the Markets & Economics Correspondent for Business Insider Australia.
For the second month in a row the signs are that the Australian economy is again defying the doomsayers and continuing to grow. Of course it’s not the strong growth we used to see in the pre-GFC era. Behaviourally that one reason why people in the economy can sometimes feel like the economy is weaker than it could be. The behavioural psychologists would say they are “anchored” on growth that was higher but no longer relevant. But as I discussed last month nominal growth is around its long run average – goldilocks would be pleased. Perhaps not too hot. But certainly not too cold.
Recently though as the Australian dollar rallied hard from the year’s low at 0.6850 against the US dollar to 0.7700, a gain of 11%, fears have grown that it could derail the economy, its growth and its transition.
Indeed RBA Governor Stevens noted in his statement after this month’s board meeting that “under present circumstances, an appreciating exchange rate could complicate the adjustment under way in the economy”. Not only did that suggest rates could be lowered again many took it as a sign that the economy was weak. But the release this month of the NAB’s authoritative Business survey suggests that if the Aussie dollar’s rally is complicating the recovery it hasn’t done so yet.
Aussie dollar rally and the RBA
The RBA isn’t keen on the Aussie dollar rallying too much further. That’s because it’s a relatively weak currency, compared to recent years where the Aussie was in the high 80, low 90 cent region has provided a boost to growth. Indeed, investment bank Morgan Stanley wrote this month that “Net trade has added an average of 1.5% to GDP in the last two years”. So they are worried that a strong Aussie will hurt “labor-intensive services exports (such as tourism)”.
That’s how a weaker currency works.
But as RBA governor Stevens has said many times recently, “not everyone can have a weak currency at once”. So there is a risk the Aussie could rally to 78 cents, perhaps even 81 cents.
If that does happen then regardless of the strength in business sentiment the chances of an RBA rate cut will surge.
It’s been 15 years since a recession in Australia. The chances of one anytime soon continue to be small. That’s not to say there aren’t pockets of weakness in the transitioning economy. But for the most part strong employment and business conditions will continue to underpin growth. Even if it is lower than what many companies would like.
Greg McKenna is an economist, trader and adviser. He runs his own consultancy and writes for Business Insider Australia. You can find him on Twitter @gregorymckenna or at www.gregmckenna.com.au