28 April 2015
Manufacturing, mining, tourism winners as dollar drops
The plunge in the Australian dollar is supporting economic growth, with manufacturing, mining and tourism the main winners, according to a new research paper from JPMorgan.
The dollar had declined against a whole basket of currencies as measured by the trade-weighted index and not just the US dollar, said the bank.
The Australian dollar was trading at US95¢ last July but was at US78¢ on Monday afternoon – an 18 per cent drop.
JPMorgan found this drop had indeed been reflected in the trade-weighted index.
The real trade-weighted index "has depreciated meaningfully, by approximately 15 per cent, over the past two years," said the bank. "About half of this decline has occurred in the past six months, with broad US dollar strength offsetting declines in the euro and the yen."
"The decline in the exchange rate so far should already be supporting Australia's growth transition."
As expected, there had been a fall in the terms of trade (the ratio of export prices to income prices) with the declining currency, the paper noted. Nevertheless, the effect on the Australian economy was still positive.
A permanent 10 per cent decline in the real trade-weighted index would lift gross domestic product growth by a total of 0.6 percentage points over two years, the paper found.
"This outcome is broadly consistent with Reserve Bank of Australia findings and suggests that unexpected currency depreciation has a meaningful impact on real GDP growth."