The last time the dollar was this high Bob Hawke was Prime Minister and Collingwood were about to be the AFL Premiers. It’s not all bad news for exporters.
The Australian dollar hit a 17-year high of US82.70¢ this week. The last time the dollar was this high Bob Hawke was Prime Minister and Collingwood were about to be AFL Premiers (strewth, that is a long time ago!).
Naturally, many market economists speculated as to how the high exchange rate would affect exporters. The general school of thought says that an appreciation of the exchange rate (that is the Australian dollar is more expensive in terms of US dollars) makes Australian exports more expensive and imports cheaper.
Goods and services exports that are particularly price elastic (that is, consumers are sensitive to prices changes) may see demand fall sharply, whilst price elastic imports will see a big pick up in demand.
Business groups are also worried – particularly in areas such as tourism and manufacturing, where high commodity prices are not on offer like their resources counterparts.
However, when you look at the dollar’s behaviour and its effect on exporters more closely, there is a little bit more to it than first meets the eye.
First, the exchange rate is just one factor affecting the decision to export.
Most of the economic evidence shows that since the Aussie dollar was floated over two decades ago, exporters have got used to fluctuations in exchange rates as part and parcel of doing business offshore.
For example, after the Sydney Olympics in 2000 the Australian dollar was worth about US50¢ but since then we’ve seen a gradual appreciation of the dollar and we’ve been “living in the 70s” for some time (as iconic Melbourne rock band Skyhooks used to say) and now we’re “live in the 80s” (Skyhooks reunion album).
Why is this so? Basically, since the Australian economy became more internationalised, the majority of our exporters don’t let fluctuations in exchange rates ruin their business plans. They see a moving exchange rate as part of operating in the global economy and make their decisions based on long-term plans and building strong relationships with clients, customers and business partners.
According to research by Austrade and DHL, while most exporters regularly monitor the exchange rate, only 20% believe it will affect their decision to further invest or expand their overseas operations.
Many exporters also undertake “hedging” in their contacts to mitigate against future changes in the exchange rate.
Second, other economic factors are important. Of course, strong commodity prices matter, as does overall growth in the world economy.
Long-term growth in export volumes are mainly determined by global economic demand, so a continuation of above-average trend growth in the world economy – particularly in the Asia-Pacific – will be a more important factor affecting exporters than an exchange rate above US80¢.
Don’t get me wrong – exporting is a tough game. But it also commercially rewarding as exporters, on average, earn high profits, are more productive and grow faster than non-exporters. They can therefore absorb external shocks in exchange rates and commodity prices because they are in it for the long haul.
Tim Harcourt is chief economist of the Australian Trade Commission and author of Beyond Our Shores.