Check-up for the economy

by David Taylor


The Assistant Governor of the Reserve Bank of Australia said today that the Aussie dollar (at current levels) is providing a stabilising influence for the economy. This idea goes right to the heart of economics and shows our economy - for all its strengths and weaknesses - is basically healthy.


See what's pushing up the price of our currency (in terms of US dollars) is our relatively high interest rates, and the demand for our country's resources. Normally the great demand for our resources would prove sticky for our policy makers. It may lead to a blow-out in inflation and higher costs of borrowing. However, as the Aussie dollar rises, the demand for our exports starts to slow down. Add to that the fact that tourism and some company profits also suffer, and you can see how it acts as a lid on economic growth.


In other words, the economy is like the weather, it tends to find its equilibrium (or balancing point) naturally - assuming it's healthy. Being healthy simply means that it's open, it caters to free markets, it's flexible, and can tolerate exogenous shocks (basically shocks that you don't see coming).


In addition to this, the Australian consumer still appears timid. Figures today revealed that consumer sentiment fell almost 2.5 per cent in March from February. That's according to the Westpac/Melbourne Institute survey. This is helping policy makers because higher prices for utilities and petrol, as well as recent natural disasters, have moved consumers to save more money. Reducing the pressure on them to raise rates.


So the higher Aussie dollar is providing a ceiling for our export sector, and higher costs of living (combined with a share market that's making very little ground) are slowing the consumer. We're clearly pushing forward, but being held back at the same time.


Picture a man trying to run with a big elastic band attached to him, holding him back. That's essentially what we're looking at right now.


David Taylor


The content in my blog is non advisory, please do not interpret this as advice in any way shape or form. These are just my thoughts and nothing I say should be acted upon.

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