Do you find the soaring Aussie dollar depressing? Don’t despair. Austrade’s chief economist Tim Harcourt reveals some silver lining for Australian exporters.
The Australian dollar is now in the high 80 US cent territory – a level not seen since the 1980s when Bob Hawke was Prime Minister and Warwick Capper was flying high with the Geoffrey Edelsten-run Sydney Swans (strewth – that was a long time ago!).
Naturally, many market economists 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 (that is, consumers are sensitive to prices changes) may see demand fall sharply, while price elastic imports will see a big pick up in demand.
Business Groups are also worried – particularly in areas like tourism and manufacturing where high commodity prices are not on offer like their resources counterparts.
However, when you look at the dollar’s behaviour and its affect on exporters more closely, there is a little bit more to it than first meets the eye.
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 grown used to fluctuations in exchange rates as part and parcel of doing business offshore. For example, after the Sydney Olympics in 2000, the Australian dollar was worth around 50 US cents. Since then we’ve seen a gradual appreciation of the dollar. We’ve been ‘living in the 70s’ for some time (as iconic Melbourne rock band Skyhooks used to say) and now we’re ‘live in the 80s’ (Skyhooks reunion album) and maybe heading further north.
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. 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.
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 a continuation of above average trend growth in the world economy – particularly in the Asia Pacific – will be a more important factor affecting exporters than an 80 US cent plus exchange rate.
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, becasue they are in it for the long haul.
Tim Harcourt is chief economist of the Australian Trade Commission and author of Beyond Our Shores. You can read his blog at www.austrade.gov.au/economistscorner.
*Thanks to Rory Robertson for his assistance.