The Aussie Dollar Has to Get Worse Before it Gets Better

Things aren’t looking great for the Aussie economy right now. We’re in a lose-lose situation, short term.

Yes, the economy just had a shot of excitement from the December growth figures. But all is not as it seems. We’re in a situation where the growth might look good, but it highlights deeper issues.

Those deeper issues include:

  • China hitting peak iron ore
  • US potentially on the brink of starting either trade wars or global wars
  • US Fed desperate to raise rates
  • Aussie dollar currently too high
  • The RBA stuck between a rock and a hard place
  • Aussie dollar at risk of plummeting
  • An Aussie property market operating on irrational exuberance
  • Households not making as much and not actually having as much to spend

Sounds like a lot. It is. There’s a lot going on. And it’s leading to some short-term pain for Australia’s economy. It’s leading to recession. But it’s not leading to complete destruction.

With the blinkers off we could once again be a great, powerful and prosperous country. It just means turning the focus to the other things we’re good at. And if we do it soon enough it could lead to the greatest opportunity to build wealth since the start of the old commodities boom.

Going down?

But aren’t we out of the woods? Australian economic growth for the December quarter was a ‘strong’ 1.1% according to the ABC.

Thus we have avoided a technical recession. Hoorah! Maybe the government should drop some helicopter money to celebrate.

Truth is, 1.1% looks great on the surface, but it’s not exactly party time just yet. The likely outcome from here is that the next quarter is a fraction of that. In fact, growth could be negative in the next quarter.

The December spike was off the back of a mini-boom in commodity prices.

However, there are reports that China is now at ‘peak iron ore’. Also, the Chinese government is making moves to crack down on a Chinese property bubble. And they’re also trying to curb capital outflows.

This all points to issues for the Aussie economy. If China doesn’t want as much iron ore, that’s going to hurt. If they don’t flood the property market with money leaving China, that’s also going to hurt. If that happens (and it already is) then the next few quarters probably aren’t going to show much growth.

You should expect  growth in the next quarter to be weak. It will likely fall back in line with the poor wages growth and minimal household disposable income growth. Add the fact should that, if we head back toward recession, you’ll see more underemployment and hidden employment issues.

The most telling statistic to come from yesterday’s figures was household disposable income, which rose just 0.2%. A big reason for this is because wages growth in the country is virtually non-existent.

But pay attention to the mainstream coverage of our escape from disaster and you’d think everything was A-OK. That’s like someone spitting on you and trying to convince you there’s a monsoon.

Yesterday Greg Canavan was bang on when he said we would avoid a technical recession. He’s also right that one of the biggest influencing factors on the Aussie economy right now is our dollar.

Greg might be right again when the RBA meets for their next rates decision.

As Greg explains,

An interest rate rise would only push the dollar higher. This would impact domestic demand as well as export income. Given that the economy still isn’t growing that strongly, I expect the RBA to err on the side of caution and keep rates stable for some time.’

I think the RBA will cut the cash rate at the next meeting by 0.25%. They must know the December quarter growth was a fluke. They must be aware that the dollar is too high. But they must also be aware that the banks are moving rates independently, so maybe now is the perfect time for a rate cut.

Rates go down and rates go up

If the Aussie dollar continues to march higher and economic growth falls, the RBA won’t have any other choice. The best outcome here, believe it or not, will be to cut rates.

A cut in the cash rate could help ease back the Aussie dollar. It might spur a little more economic growth. Those corporate profits might rise again, and flow through to employees. Businesses will grow, expand, employ full time. Perhaps household incomes will rise, even disposable incomes. Or at the very least, it will keep our heads above water until the US makes a move.

Some might expect this to further fuel a housing price surge. It won’t. An RBA rate cut will come amid the rising cost of lending to our banks. They’ll be pushing up their retail rates while the RBA is cutting.

It won’t fuel higher property, as higher retail rates will put it out of reach at current prices.

Of course if the US decides to lift their rates, then that’s also going to help ease back the Aussie dollar — or at least it should. The Fed seems fixated on raising rates. In that case, according to economic theory the Aussie dollar should fall. If this happens whilst the RBA cuts then the Aussie dollar should plummet.

Theoretically that’s good for exports. And that might put the growth afterburners on. But it probably won’t. Remember, we’re relying on a mini-commodities price boom to spur our growth now. That’s likely to end with peak China iron ore. And a plummeting dollar will mean more export but less profit.

It’s like the coffee shop that’s selling more coffee but getting paid less per cup.

The world’s supermarket and school

If that’s the outcome, then what’s driving growth? Not much, if our focus remains on commodities.

So wages will stall, maybe even fall. Household incomes will come under further pressure. Disposable income will tighten, if not fall. And that equates to even more pressure on a precarious property bubble that could go, ‘pop!’

Of course there is only one way out of this situation. It’s not rates. It’s not commodity prices. It’s not the Aussie dollar. It’s figuring out what Australia has, makes and can do that the rest of the world desperately needs, and then selling it to them.

While the situation now looks dire (and it is), it’s not game over yet. I still believe there will be a major property price correction. And that it will happen in the next two years. But we’re already starting to figure out that we have more to give to the world.

Agriculture, education, tourism, these are all things we can sell to the rest of the world to make Australia great again. That’s where the focus should and needs to be. That’s where opportunity exists, and that’s where Australian wealth will be created again.

Australia needs to take off its commodities and property blinkers. If we can do that in the next few years then we can turn the country into the world’s supermarket and school. Then we won’t need to worry about slow or negative growth anymore. Just how to keep a fast growing country under control again.

Regards,
Sam

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