RBA: Low dollar no saviour for manufacturing

More arse covering from the RBA today, this time arguing that a lower dollar could not have saved Australian manufacturing. From The Canberra Times:

A lower exchange rate would not have helped manufacturing during the mining boom, according to modelling conducted by the Reserve Bank…

But the Reserve Bank paper, Exchange Rate Movements and the Australian Economy, suggests that fixing the dollar at 2003 levels – around 60 US cents – would have made little difference.

“Even a constant nominal exchange rate would not have prevented the ongoing decline in the relative size of manufacturing, which is due to broader technological and economic factors,” said the paper.

“At most, according to this scenario, a weaker exchange rate would have reduced the pace of the decline.”

While it is true that the manufacturing sector has been in decline for decades:

There is little doubt that the strong appreciation of the Australian dollar has added significantly to manufacturing’s woes, as clearly illustrated by the next chart:

The RBA’s own research, released last month, supports this contention, finding that the mining boom has had an adverse impact on manufacturing, with this impact also likely to worsen over the coming decade:

The manufacturing sector has been the focus of concern about the ‘Dutch disease’ and ‘deindustrialisation’. In the short term, manufacturing output is supported by the higher incomes and expenditure associated with the mining boom… However, this effect is more than offset by the 40 per cent appreciation of the exchange rate, which makes manufacturing less competitive. In the first decade of the boom the net effect is moderate, with manufacturing output estimated to be about 5 per cent lower in 2013 than it would have been in the absence of the boom. Then, as the investment boom fades, and with it the demand for manufacturing inputs, the relative price effects increasingly dominate. By 2016, manufacturing output is about 13 per cent lower, an effect that continues to increase over time.

So yes, while manufacturing has been in decline for decades, its plight has definitely been made worse by the strong Australian dollar, which has hollowed-out Australia’s trade-exposed industry.

It would be a great act of irony if the Australian dollar plummeted just as Holden shifted its production to Korea, with Australians then finding the cost of a Korean built Holden more than what could have been built locally.

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