Farewell non-mining tradables recovery

MB has for a long time championed an externally led post mining-boom adjustment for Australia. By that we’ve meant that when Australia found itself with an enormously bloated real exchange rate in 2011, so bloated that everything tradable was being thrown into the sea, including the car industry, the nation needed to do what it took to deflate itself back to competitiveness. Preferably engineering as soft a currency as possible.

The powers that be in the RBA and Treasury decided to do the exact opposite, pushing for domestic reflation via a revitalised housing bubble. As such, we’ve struggled ever since to improve competitiveness at all. And even when we finally did, it was in large part thanks to US tightening which strengthened the USD, as we fought it all the way by propping up the housing monster.

This is what MB called the Dumb Bubble.

Today we get the comeuppance as the US struggles to tighten further and the Aussie dollar takes off. And guess what, that’s the end of the only good part of our post-mining boom adjustment, the rise of non-mining exports, from JPMorgan:

We think the exchange rate is becoming a problem for both inflation and growth. Consumer goods import prices were very weak in yesterday’s CPI data, and on the detail today, that weak momentum in imports should carry through to more CPI headwinds, particularly feeding in AUD appreciation in Q3. The TWI [trade-weighted index] at current levels is also no longer likely to be supporting services exports, which had previously been adding around 0.5 percentage points to growth per year.

Today the RBA has a new leader that won’t cut rates for fear of making the Dumb Bubble even bigger. Yet his tradable recovery is hitting a currency brick wall right before our eyes even as his domestic reflation is set to stall into 2018.

I don’t think the high currency will last for very long, a few quarters or so, but as usual, by pulling all of the wrong levers we’ve left ourselves very exposed to imbalances that we needn’t have and have done our best to retard the best business sectors that we have in the country.

As domestic weakness combines with external weakness next year, the RBA will be hard pressed not to cut rates again.

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