Why a lower dollar is good for you

There’s only one thing for certain in this world and that is that most market economists’ forecast will be wrong. You only have look at how badly they have under-estimated the jobless numbers over the past year to know that.

So it comes as somewhat of a relief to look at the Fairfax Business Daily Economic Outlook Survey for 2014-15 to see that on average those economists are not predicting anything. That’s right it’s steady as she goes. Now that can’t be wrong can it?

The only thing they’re sticking their collective necks out on is the value of the Aussie dollar – it’s going to dive to its lowest level in half a decade. This year’s survey has it hitting US86c by June 30 next year. It’s currently trading in the US93c to US94c range.

Now if the 25 economists, who also come from academia and industry groups, get this right then most of the other predictions on economic growth, budget deficit, unemployment, interest rates and the sharemarket can basically take care of themselves.

In summary they forecast 6 per cent unemployment, 2.8 per cent GDP growth, low household spending at 2.6 per cent, low wages at 2.6 per cent, a reasonable fall in the Budget deficit to $32 billion, interest rates fractionally higher at 2.69 per cent and the dollar down 8 per cent at US86c. And I almost forgot, the market will put on 300 points yo around the 5800 mark.

Of course there at economists at both ends of these numbers who are willing to make braver calls, but not by much.

If the dollar falls on the back of a continuing retreat in Australia’s terms of trade – the prices of imports over the prices of exports – then it will come as the answer the Reserve Bank governor Glenn Stevens’ prayers.

Stevens has been attempting to talk down the dollar for the past year to not much success. He thinks it’s historically out of line in relation to those above-mentioned terms of trade numbers. He also knows that a lower $A will help underpin the transition that the Australian economy is undergoing as the mining boom enters its consolidation phase. It would also cool down parts of the economy, i.e. housing prices, without having to do anything on the interest rate side.

Historically low interest rates would also help the jobs market, as many industry sectors would find themselves more competitive.

The one hurdle to overcome is if the US economic recovery builds up a head of steam and pulls those struggling parts of Europe along with it, thus putting pressure on global interest rates.

The good news is that Australian banks are no longer as dependent on overseas markets for financing as they were leading up to the Global Financial Crisis. The bad news is many Australian corporates have gone back into that market of late to take advantage of very low rates.

If rates rose globally it would be hard to believe that Australia would not be affected and those predictions for a lower dollar would be on shaky ground.

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