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Finance - Diversity in growth |
Something strange seems to be happening to the Australian economy. The Government and the Federal Treasurer assure us that everything is rosy.
Economic growth will slow a little in the next year but it is still likely to be around four per cent. By historical standards this is quite good. Go back a decade and a four per cent growth rate would have been something to worry about.
The consensus at that time was that the Australian economy could only grow sustainably at around three per cent a year or a little higher. Once it reached four per cent all sorts of dreadful things would happen. There would be bottlenecks in the economy, unions would push for higher wages, prices would start to rise and interest rates would start to rise rapidly. In turn the economy would be forced into retreat.
But these days, we seem to be able to grow at four per cent or better with few of these side-effects. So a growth rate of four per cent appears to be good news.
But business does not seem to be so enthusiastic. Several surveys indicate that business confidence is falling. One survey even suggested that big trouble is in store and that business confidence is at its lowest level since the recession in the early 1990s. The “R” word has been mentioned several times.
How can this be? Why is there this contradiction between Government forecasts and the attitude of business? Why this is so is a matter for conjecture.
It could be high oil prices, it could be the falling Australian dollar, it could be the effects of the GST and the new tax system and it could be the aftermath of the Olympics. It may be a combination of all these. And of course it may be that business is being too pessimistic.
For the first time many businesses have become unpaid tax collectors and many resent the time involved. But anecdotal evidence points to a post-Olympic downturn that is reflected in the business surveys. It has certainly had an adverse effect on the building industry, which is suffering from the pull-forward effect that happened before the introduction of both the GST and the staging of the Olympics. The building industry, which often leads the rest of the economy, is in decline. Hopefully this is only temporary.
High oil prices must also be having an effect. Farmers, the transport industry and other high fuel users are hurting.
But the Australian dollar may also be responsible for some of the contradiction. A lower dollar means that exporters benefit.
Exporters are either price takers or price makers. The price takers, such as our primary producers, sell their product at the going world market price, which is usually expressed in US dollars. A falling Australian dollar means that on conversion back to Australian dollars they receive more.
Price makers, such as tourist operators, sell in Australian dollars. From a foreign perspective it means that these products or services become cheaper and more of them can be sold. In short, the export sector of the economy in general terms is doing much better than before. Consequently we have a situation where one sector of the economy is doing well because it exports while the remainder is either muddling along or going backwards.
It means that the Government and business could both be right. What are the implications of this?
Hopefully the export sector could drag the rest of the economy into better times.
If not then we may see companies in the domestic market suffer in terms of profitability while the exporting sector does nicely. This should be reflected in share prices.
Of course this all assumes that the Australian dollar will stay low against the US dollar. There is no guarantee about this. Currency markets are extremely volatile and swayed by sentiment as much as anything more concrete. However there is some evidence to suggest that the fortunes of the Australian dollar are closely linked to the level of economic growth in the United States.
If the US economy is strong then the Australian dollar (and many other currencies) is weak. Investors around the world want to invest in the US even though there may be excellent opportunities elsewhere. But if the US economy starts to weaken then the currency markets could have a change of mood. The Australian dollar would then rise, oil prices would probably fall (less demand from the US) and maybe business confidence would pick up.
When the change comes it could be quite swift. One side effect would be that the Reserve Bank would make a sizeable profit. It has been buying Australian dollars at a furious rate over the past nine months or so in an attempt to keep its value up. If the dollar rises in value it will be able to offload these purchases at a handsome profit.
This will then go into the Federal Government’s budget surplus.
David Tomlinson is a freelance finance journalist based on the Northern Rivers.
This article was published in the December 2000 edition of GPSpeak.
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