Lower Australian dollar a mixed blessing for business

Advertisement
ScreenHunter_12 May. 16 13.14

By Leith van Onselen

NAB has released some interesting research today arguing that around one-third of Australian businesses are hurting from the recent depreciation of the Australian dollar, which has raised input costs for some domestic industries that are in no position to pass them on. Industries most affected are wholesale, manufacturing, retail and mining. On the other hand, the lower dollar has also helped raise returns in export markets and blunted some import competition, helping some industries.

Despite the recent depreciation, 32% of non-farm businesses reported an adverse impact from the $A. Around two-thirds of wholesale and almost half of retail responses were negative, probably because lack of pricing power is seeing the depreciation squeezing margins in these sectors. Adverse effects were also very pronounced in manufacturing (59% of businesses) and mining (30%).

ScreenHunter_04 Sep. 27 09.54

As expected, trade-exposed manufacturing reported a relatively high incidence of adverse effects from the level of the $A, despite the recent depreciation. In fact, it is possible that the result would have been more adverse in previous quarters. Surprisingly, however, the most negative impacts were reported by wholesale trade. This may be because the $A, while high, is lower than it has been, leading to higher import prices that have had to be absorbed in lower margins. Adverse effects were also high in retail trade, possibly again as a result of margin compression…

The mining sector also reported large adverse effects form the $A, although this may reflect the combined effects of a high $A and weaker foreign currency commodity prices. Adverse effects were relatively minor in transport & utilities, with a high $A contributing to high import volumes. Industries with a predominantly internal focus, such as recreation & personal services, finance, business & property and construction also recorded relatively low adverse effects.

ScreenHunter_05 Sep. 27 09.58

Negative exchange rate effects were more prevalent in SA than elsewhere, possibly reflecting the relative importance of manufacturing there. Impacts from the $A were less pronounced in WA despite the presence of the mining sector. Negative responses were lowest in Tasmania, although on a small sample.

About the author
Leith van Onselen is Chief Economist at the MB Fund and MB Super. He is also a co-founder of MacroBusiness. Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.