Tanking dollar a worrying sign
THE Australian currency is suddenly sinking as global markets absorb a rash of weak news about the Australian economy.
Our dollar has fallen to its lowest level since 2016. At time of writing it is below 72 US cents, and there are reasons to think the fall might continue.
The engine of Australia's economy is sputtering a bit, and that is making our dollar suddenly unpopular.
Retail sales figures came out on Monday and they fell short of expectations. Now, growth was not expected to shoot the lights out in the month of July. The consensus of economists was a moderate growth of 0.3 per cent. Instead we got zero. No growth.
That's the sort of number that gives economists the heebie-jeebies. What exactly is happening to Australian consumers? We already know wages growth is pathetic. It has been for ages. What's new is the extended fall in house prices in Australia's two biggest cities.
People's spending depends on their wealth, and if house prices are falling, their wealth is shrinking. (Researchers can actually see this in the data - sales of cars go up when house prices rise, even if the household is making no more income.)
So falling retail sales is a concern for the Aussie economy. It could punch a hole in the economic growth we need to keep unemployment falling. And on unemployment we have disturbingly ambiguous news.
THE CALM BEFORE THE STORM?
The number of job advertisements in this country has stopped growing. It hasn't started falling though. But as the graph below shows, after four years of growth it hit a level in January and hasn't broken through since.
This chart makes it look like there are a lot of job ads in historic terms - but the population keeps growing. If you look at the number of job ads as a proportion of the labour force, the level we've flattened out at suddenly seems far less impressive. (See the orange line in the graph below.)
All this bad and ambiguous news on the economy is damaging for the Aussie dollar, and we're about to find out why.
WHY DOES THE DOLLAR REACT TO OUR ECONOMY?
The main reason is interest rates.
If interest rates in Australia are higher than the rest of the world, then investors in London and New York will want to put money here to get the best returns. To invest in Australia, they need Aussie dollars. When they go and buy Australian dollars, the extra demand forces up the price of an Australian dollar. (The exchange rate is just the most recent price paid for an Aussie dollar in, say, US dollars.)
At the moment, fewer people are eager to buy our dollar. Our interest rates are low and staying low. But interest rates keep rising in America as their economy booms. So smart investors are moving their money stateside in search of better returns. They're selling Aussie dollars for US dollars, pushing our exchange rate down.
The hardest part of a falling dollar is for those same poor retailers we started with.
If they are selling imported goods (and remember, that's a lot of consumer goods these days), they face a tough choice on whether to put up prices. If they do, people will shop somewhere else. If they don't, they have to eat the rising cost and falling margins.
Many retailers are actually very slow at "passing through" exchange rate changes, research suggests. They don't always pass on the cost of a lower Australian dollar to the consumer at first. (The exception? Petrol retailers!) As we saw above, people are already reluctant to spend more in the shops. We are a very frugal country these days and they don't want to spook us with a sudden price hike.
THE GOOD NEWS (FINALLY!)
Like all things in the economy, a falling price is good for some people and bad for others. There is a whole new set of winners and losers. Exporters are happy, for example, while importers grimace
Imagine an exporter that has $US1000 in revenue from America each week. At the start of the year they could turn that into $1280 (AUD/USD = 0.78). Now it turns into $1390 (AUD/USD = 0.72). Free pay rise for them! The poor exporter, of course, gets the opposite.
Luckily, many of us can catch a bit of that exporter happiness.
Aussie companies that compete with imports will do better. The lower our dollar goes, the better Aussie rum can compete with US bourbon, for example.
If you work in tourism or education, a lower dollar should bring more customers to your door as well. As a bonus, they are more likely to consider what you are selling to be cheap. This is why people say a lower dollar makes Australia more "competitive".
On balance, a lower dollar doesn't make bad times worse. Overall, it should act as a shock absorber, making the economy more competitive when the signs turn bad. This is why we let the exchange rate fluctuate - its fall is a sign things are bad but also the reason things will get better.