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The great recovery and the soaring dollar

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The great recovery and the soaring dollar article image

The Australian dollar is now in US90-cent territory and there are fears this could affect our strong showing in 'the great recovery'. There is even some market speculation that the Aussie battler will reach paritywith the greenback. Naturally, many market economists have also speculated as to how the high exchange rate would affect exporters. The general school of thought says that an appreciation of the exchange rate - that is the Australian dollar is more expensive in terms of US dollars - makes Australian exports more expensive and imports cheaper. Goods and services exports that are particularly price elastic, where consumers are sensitive to prices changes, may see demand fall sharply, while price elastic imports will see a big pick up in demand. This is assuming, of course, that lower prices are passed on. Business groups are also worried, particularly in areas like agriculture and manufacturing where higher commodity prices are not on offer like their resources counterparts. While non-rural commodity prices have been holding up better than expected - thanks to the China’s insatiable appetite for coal, iron ore and liquefied natural gas - other sectors of the economy have not been so fortunate. However, when you look at the dollar’s behaviour and its effect on exporters more closely, there is a little bit more to it than first meets the eye.

The dollar isn't everything

Firstly, the exchange rate is just one factor affecting the decision to export. Most of the economic evidence shows that since the Aussie dollar was floated over two decades ago, exporters have become used to fluctuations in exchange rates as part and parcel of doing business offshore. Why is this so? Basically, since the Australian economy became more internationalised, the majority of our exporters don’t let fluctuations in exchange rates ruin their business plans. They see a moving exchange rate as a fact of life of operating in the global economy and make their decisions based on long-term plans and building strong relationships with clients, customers and business partners. One lesson of the Asian financial crisis that occurred a decade ago was that Australian firms that stuck in the region ‘through thick and through thin’ were well regarded in Asia when the economies bounced back. Nobody likes a carpet-bagger who takes off when the going gets rough only to magically re-appear when times are good again. We're seeing similar things occurring in the global financial crisis too. In fact, according to research by Austrade and DHL, while most exporters regularly monitor the exchange rate, only 20 percent believe that it will affect their decision to further invest or expand their overseas operations. Many exporters also undertake hedging in their contacts to mitigate against future changes in the exchange rate. According to the survey data, 24 percent of large and 25 percent of medium-sized exporters engage in some form of hedging compared to only five percent of small exporters and four percent of microbusinesses. Secondly, other economic factors are important. Of course, strong commodity prices matter, as does overall growth in the world economy. Long-term growth in export volumes are mainly determined by global economic demand, so return to growth in the world economy - particularly in the Asia-Pacific - will be a more important factor affecting exporters than a 90-cent-plus exchange rate. If the emerging economies can lead the recovery from the GFC then this will be crucial for our exporters. Thirdly, most media commentary says that exporters will be losers from a high dollar and importers will be winners. But they are not two distinct groups. Around 45 percent of Australian exporters are also importers, so a high dollar may mean a more expensive product on the price side, but it may also be cheaper on the cost side when an exporter imports components or stock. It’s a matter of swings and roundabouts. Don’t get me wrong, exporting is a tough game. But it is also commercially rewarding as exporters, on average, earn high profits, are more productive and grow faster than non-exporters. They can therefore absorb external shocks in exchange rates and commodity prices as they are in it for the long haul. Australia is one of the few economies in the world to achieve export volume growth despite an 11 percent fall in world trade in 2009. That Australian exporters have achieved this, despite the GFC and the associated ‘recession porn’ we read in the press, is a remarkable achievement and helps explain why the Australian economy has gone from ‘Down Under’ to 'Down Wonder’ in the eyes of many international investors. -Tim Harcourt is chief economist of Austrade and author of The Airport Economist. See his column at www.austrade.gov.au/economistscorner

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