The mining boom drove a rise in the dollar that destroyed the competitiveness of Australian export and import-competing industries, a new report claims.
In its latest Economic Outlook report, leading industry analyst and economic forecaster, BIS Shrapnel says a lower dollar is now starting to benefit those industries.
And they will lead the non-mining recovery.
But BIS Shrapnel Chief Economist, Dr Frank Gelber, warns that Australian industry is still not competitive and that the dollar isn’t yet low enough.
“We expect the dollar to fall further; our forecast is US$0.70,” said Dr Gelber. “But even US$0.70 won’t be enough. At US$0.70 some industries will be competitive, notably tourism and education services.
“But others will need an even lower dollar to be competitive.”
Which begs the question: how low does the Australian dollar need to be?
According to BIS Shrapnel, a country’s competitiveness is best represented by its unit labour costs (ULCs) relative to other countries.
ULCs are total costs per unit of output, or wages, divided by labour productivity. They are the best indicator of domestic production costs, which are primarily direct and indirect wages.
Based on previous data, Australian wage inflation is a little higher than many other countries and adjusted for productivity growth, our unit labour costs have risen more strongly than many other countries.
Australia is on a par with the UK, a little higher than Italy and Canada, a little higher still than the US and Korea, and much higher than Germany and Japan.
However, these influences on competitiveness have been absolutely swamped by movements in the currency. Australia’s decline in competitiveness (through rising costs) over the last decade has been driven by the rise in the Australian dollar from US$0.50 at the beginning of last decade to well above parity a few years ago.
Any inroads Australia could have made into inflation and/or productivity growth would have been minor.
Trade-exposed industries to lead recovery
“We now know the shape of the recovery in Australia’s non-mining industries, including the long-awaited recovery in non-mining business investment,” said Dr Gelber.
The lower Australian dollar will underwrite a recovery in Australia’s export and import-competing industries. Most of the trade-exposed industries have been flat-to-depressed through the whole period of high dollar, deferring maintenance and allowing their assets to depreciate.
Improving demand will now lead to a catch-up in maintenance and then new investment.
And that will lead the recovery in the non-mining sectors, both in terms of growth and investment, gradually broadening to other non-mining industries, firstly in terms of growth with investment chiming in later.
Australian dollar forecast
“Now the dollar is back to US$0.76-US$0.78, and that has dramatically improved competitiveness, leading to the beginning of a resurgence in tourism and education services,” said Dr Gelber. “These will be boom industries in five years’ time.
“But it’s still not enough for other trade-exposed export and import-competing industries.”
BIS Shrapnel expects the dollar to fall further. The company forecast is for US$0.70 driven by an expected rise in US cash rates.
The RBA should continue to keep interest rates low – focusing on domestic monetary considerations – with the resultant reduction in the interest rate differential underwriting another phase of the fall in the Australian dollar.
Yet the company warns that US$0.70 still won’t be enough.
Businesses to benefit
“On our calculations, the dollar needs to be between US$0.58 and US$0.70 for Australian industry on average to be competitive,” said Dr Gelber. “That’s a broad range. But it reflects the nature of industries both here and overseas.”
At US$0.70 some industries will be competitive, notably tourism and education services. But others will need an even lower dollar to be competitive.
“Some still won’t be competitive even when the dollar is below US$0.60.”
Other industries to benefit from a lower dollar will include agriculture, some parts of mining, manufacturing, finance and business services. Some parts of these industries will be boosted by the lower dollar, but others will need a still lower dollar to be competitive. Some operations, both big and small, have been lost through the period of the high dollar and will never come back.
“For a market so volatile, the Australian dollar shows a remarkably stable relationship with commodity prices and interest rate differentials,” said Dr Gelber. “There is some possibility of an overshoot if confidence turns against Australia – that would be a good thing for Australian industry and jobs.
“But we are not holding our breath.”
Based on past behaviour, commodity prices would have to fall even further than they have already to underwrite a dollar low enough to restore competitiveness.