Dollar direction
So far the Australian dollar has been surprisingly resilient, remaining comfortably above 92 US cents despite earlier predictions that it could drop below 70 US cents this year.
But forecasters remain bearish even if they’ve had to adjust their timetable. Consensus is still for the AUD to fall, but the question is when? BIS Shrapnel economist Richard Robinson predicts it will take three to four years to fall below 80 cents, while John Abernethy from Clime Asset Management expects it to happen within two years.
Businesses benefiting from a lower Australian dollar will include exporters, companies with significant US operations and tourism operators. But importers will suffer as overseas goods become much more expensive.
Interest rates
Australia’s record low interest rate is supposed to be helping the economy strengthen. The RBA believes that the full effect hasn’t been seen yet, indicating it will keep rates at their current 2.5 per cent level in the short to medium term. The construction industry, for example, has only just started to experience growth.
The problem for the RBA is that it doesn’t wield a lot of control over the Australian dollar. Overseas influences, such as US and Japanese monetary policy, have far more impact on Australia’s currency than adjustments to its own cash rate. This makes it harder for the RBA to stimulate Australian economic growth through rate cuts.
Business confidence
Businesses are currently optimistic according to the latest NAB monthly survey. It shows business confidence hitting its highest level in almost a year. NAB’s business conditions index has also risen to its highest point in nearly four years.
Roy Morgan also saw business confidence rebounding in July. Finance and insurance businesses are the most optimistic, with 57 per cent of all respondents planning to invest in growing their business over the next 12 months.
Dun & Bradstreet’s Business Expectations Survey found business confidence climbing to 11-year highs. A staggering 63 per cent of respondents in the services sector expect to see higher sales in Q4 of 2014, while only 11 per cent predict a decline.
Consumer confidence
Consumer confidence looks more mixed. The weekly ANZ-Roy Morgan Consumer Confidence index took a sharp tumble in May, around the time of the federal budget, falling to its lowest level in five years. It’s on the way back up again, but still looks significantly lower than 2013.
The Westpac-Melbourne Institute Index of Consumer Sentiment also picked up slightly in July, but was still below expectations. It revealed low expectations for the labour market expectations as well as the five-year economic outlook.
Australian households are also continuing to save more – another sign that people are concerned about the outlook for income and employment. Consumers spending less is bad news for retailers.
GDP growth
BIS Shrapnel’s forecast is bullish on Australia’s GDP, predicting it will average 3 per cent annually, with a third of this coming from foreign trade. But the Reserve Bank of Australia recently lowered its forecasts for both GDP growth and inflation, as did Westpac.
Employment forecasts
The unemployment rate rose to its highest level in 12 years in July (seasonally adjusted). It’s now at 6.4 per cent, despite the market expecting to have remained stable at 6 per cent.
BIS Shrapnel warns that the strong Australian dollar will lead to slow jobs growth over the next four years. That’s bad for the entire economy: depressed employment means lower consumer confidence and the domino effect of lower consumer spending.
But if the dollar bears are right, and the Australian dollar falls significantly against the US dollar, the economy may get a boost, which will be great for many businesses. For now, with such a mixed and uncertain picture, as well as global conflict presenting continued volatility, the wisest outlook is to remain cautious but optimistic.
