Published daily by the Lowy Institute

New study charts export benefits of falling dollar

New study charts export benefits of falling dollar
Published 9 Jul 2015 

The resource sector has been the main driver of the Australian economy for much of the last decade. It has played this role in two ways. First and foremost, by delivering a large 'national pay increase' through rising US$ commodity prices. Second, by selling larger export volumes at the higher prices (though admittedly, for much of the decade supply constraints held back this response). But since 2014, the boom has ended, and in its wake has come falling national income courtesy of slumping commodity prices and slowing GDP growth courtesy of falling resource investment.

The transition to new sources of growth isn't proving to be an easy one. Anxiety among commentators – in the media, academia and business alike – is high. This article on the front page of yesterday's AFR is illustrative. It says living standards are heading back to 1990s levels as slumping commodity prices and the falling Australian dollar crimp household purchasing power.

But is the après-boom gloom being overdone?

After all, a weaker currency should, all else being equal, increase the competitiveness of Australian exports. A recent Efic study found that a 10% depreciation in the exchange rate would, all else being equal, lift non-resource exports by 7%. The adjustment times would vary by industry, with agricultural export volumes boosted within the first 12 months of the depreciation, while the benefits to services and manufacturing would take much longer to propagate. Increasingly competitive Australian non-resource exports would allow domestic firms to capture greater market share in faster growing emerging markets. This would lift profits and incomes, capping the decline in living standards.

Photo by Flickr user herefordcat.



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