The Australian dollar is set to remain high over the next year, putting more pressure on already-strained exporters, says Access Economics latest Business Outlook. The report suggests the dollar should start to deflate towards 2012 as the global economy starts to pick up.
The comments come as the Australian dollar once again came close to parity last night at US99.48c, fuelled by a rise in producer prices which has sent expectations of an interest rate rise on Melbourne Cup Day next week soaring.
Access economist Chris Richardson says the dollar will remain high over the next year due to rising interest rates and overall economic growth, giving tourists and internet-browsers hope for another year of cheap shopping. But he warns that ultimately, the dollar will need to fall down to its 10-year average of US80c.
“We don’t see it necessarily going higher. We don’t have it lingering above parity, and ultimately we do see it coming down. Two things are going to happen here. The first is that the western world will get healthier and interest rates will go up, at which point the dollar loses support.”
“The second point is that commodity prices are going to come down, as a consequence of the higher pace at which the world’s miners invest in new output. Lower commodity prices are going to have an impact on the dollar.”
Richardson says while he sees some very supportive factors for the dollar remaining high over the next year, they are not permanent. He says that he is more “comfortable with that US80c figure”.
The rest of the outlook paints a solid picture of Australian economic growth. Richardson points out that while global growth is going to level out, the risk of a double-dip recession has passed and the only thing holding Australian growth back is domestic problems such as housing supply.
“The disappointments we see are more in the developed world. Stimulus was always going to wind back, families reassess their spending plans and businesses are restocking and moving back to normal.”
“The risks to our good fortune may be rising, but Australia’s economic recovery is continuing, and Access Economics projects it will strengthen further from here,” the report states. “In part that is because we are more reliant on China than on anywhere else (and more reliant on China than we ever were on the United States).”
The report claims that with strong prices and export quantities lifting, the trade balance is set to remain positive, while imports “are also getting up a head of steam as families start to spend more and businesses follow suit”.
“Profits are back at record highs, dropping the effective cost of employing people to record lows. Continuing recovery will combine with that to generate further job gains, although not at the pace of late.”
Richardson points out the country is actually set to experience another resources boom, possibly even more lucrative than the last.
“Resource Boom Mark II will be even bigger than Mark I was from 2006-2008 for Western Australia,” the report states.
It also points out that there is an “enormous momentum” building up in the “sunbelt States” such as Queensland and the Northern Territory.
This should provide a big boost to profits in the resources sector and other industries, Richardson says. But he also points out the country is facing a severe skills shortage due to a slowdown in migration.
“With international migration now falling instead of rising, Western Australia risks suffering from even bigger skill shortages and price and cost pressures than it saw last time around,” he says.
Part of the problem, he says, is that the minority government is attempting to help address all sides of the issue rather than focusing on policies that will help the mining boom and the country as a whole.
The skills shortage is actually one of the few risks that could help drag Australia’s economic growth down, Richardson says.
“There are rising domestic risks ahead too, with Australian consumers not yet embracing retail therapy with the same enthusiasm that they have shown in times past, while the recovery in housing construction is dragging its feet badly, and government stimulus spending is soon to recede as a growth driver,” the report claims.
“That makes the upswing in business investment spending now set to start absolutely vital to a broadening in Australia’s recovery – we need to see the likes of the Gorgon project and other resource spending take the baton of growth from the construction of school halls.”
Richardson also says demand and wage pressures are set to increase over 2011 and 2010, and that there will be further interest rate pressures during 2011.
“There are a few domestic-related risks. Families are being much more careful with their spending, like the rest of the world, and the housing recovery is dependent on the release of land, and in many cases people are still dragging their feet.”
“This means that the baton of growth is dependent on engineering, construction and resources-related work. Now, that looks as though it will happen, but our degree of commodity dependence is extremely high – and prices in that area are always volatile. We run the risk of a bad year or two.”
Patrick Stafford is a freelance journalist and a former deputy editor of SmartCompany.
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