Dollar’s drop could save us from recession – News.com.au

Article from News.com.au – excerpts and comments

“The dramatic descent of the Australian dollar over the past month – from almost US98.5c to US85c – has severely dented their buying power on several continents. “

“However, the slumping currency could be a key factor in preventing Australia from following much of the Western world into recession.”

“For the economy as a whole it’s good news, even though it’s bad news for travellers,” says AMP Capital Investors chief economist Shane Oliver.

There are predictions for†the dollar†to fall further in the short term, down to about US80c.

What has caused such a sharp U-turn?

Firstly, the Reserve Bank of Australia†talking about lowering the official interest rate. Second, commodity prices such as oil and base metals have dropped heavily amid fears of global economic slowdown. Third, the US dollar has bounced back against most other countries’ currencies in recent weeks.

These factors have combined to force the Aussie dollar to a seven-month low, although it should be put into perspective. A US85c exchange rate is still much stronger than the levels below US50c it hit in 2001.

While overseas travellers might wish to protest, the latest drop in the dollar creates more winners than losers.

“At US98.5c it was bad for the competitiveness of Australian companies”. Now, exporters will find customers can better afford their goods.

Farmers will get more money for their crops, miners will get more money for their metals, and even local tourism operators will find their sector becomes more attractive to foreigners as travel to Australia becomes more affordable.

Just as Aussies heading offshore have lost up to 15 per cent of their purchasing power in a month, many travellers coming to Australia now get 15 per cent more.

Wine exporters and motor vehicle manufacturers will also benefit from the local currency’s fall.

Businesses benefiting from these improved terms of trade are less likely to slash jobs, so the risk of Australia sliding into recession is reduced.

But AMP’s Dr Oliver says we are not out of the recession woods yet. He still thinks there is a 40 per cent chance of Australia going into recession, up from a 20 per cent chance at the start of the year but less of a chance than it would have been had the Reserve Bank not suggested that interest rate cuts are on the way.

“The Reserve Bank has started to head off the risk,” he says. “Lower interest rates will certainly help, but they haven’t improved in the US, UK and Canada.

“There is still a risk. At last count there were 12 significant economies around the world that have recorded negative gross domestic product (GDP) growth in the March and June quarter.”

Australia’s annual economic growth has slowed sharply from 4 per cent, and figures due out tomorrow are expected to show just 0.3 per cent GDP growth for the June quarter and an annual rate of 2.8 per cent.

“We are probably on the way to about one or 1.5 per cent over the next 12 months,” Dr Oliver says.

“Obviously the mining sector is still keeping us afloat. The consumer side already seems to be in recession.”

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