Reserve Bank of Australia Deputy Governor Ric Battellino said a likely fall in the local dollar will help insulate the nation from an economic slump in Europe, where a “disruptive event” can’t be ruled out.
“It would be prudent to assume that, if the European economy were to slow markedly over the next year or so, Australia would be affected,” Battellino said in prepared remarks for a speech today in Sydney. “It is also likely, however, that if that were to eventuate, the exchange rate of the Australian dollar would fall, as it has when global growth has weakened in the past, providing some cushion.”
Demand for Australian resources from emerging nations such as India and China helped boost the Australian dollar to a record in July. The currency declined after Battellino’s comments, with the so-called Aussie having depreciated 2.9 percent this month as the RBA made its second straight rate cut in response to increased risks to global growth and rising unemployment.
“While the direct exposure of Australia to a slowing in European demand is low, the indirect exposure, through the effect on some of our important trading partners, could be significant,” the RBA’s No. 2 official told the 24th Australasian Finance & Banking Conference. “China and India, for example, both ship a substantial share of their exports to the euro area and these could be expected to decline.”
The Australian dollar decreased 0.3 percent to 99.88 U.S. cents at 12:40 p.m. in Sydney from yesterday in New York.
Resource projects in Australia valued at A$456 billion ($457 billion), driven by companies such as BHP Billiton Ltd. (BHP), have cushioned a slump in manufacturing and services hit by a record currency and subdued consumer spending. The currency reached a record $1.1081 on July 27.
Battellino, who didn’t directly address monetary policy in today’s speech, is stepping down as deputy governor Feb. 14 after 39 years at the central bank, succeeded by Assistant Governor Philip Lowe.
In his prepared comments, Battellino, 60, said Australia is “fortunate to be subject, simultaneously, to a resources boom that is resulting in unprecedented investment and therefore helping to sustain economic activity.”
China, Australia’s biggest trade partner, is buying up iron ore, coal and natural gas as millions of people in the world’s most populous nation move to urban centers.
Europe’s fiscal turmoil is cutting demand in China’s biggest export market, and a Chinese government campaign to rein in property prices is threatening home sales and construction. Economic growth cooled to 9.1 percent last quarter, the least in more than two years, and an increase in exports in November was the weakest since 2009 excluding seasonal distortions.
Battellino said it is possible that a combination of credible fiscal commitments by European governments and short- term support from the European Central Bank and International Monetary Fund will provide a solution that is relatively benign for the European and world economies.
“However, other outcomes, including deflation caused by prolonged fiscal austerity, inflation caused by large-scale debt monetization, or some disruptive event such as a change in the composition of the euro area, cannot be ruled out,” he said.
Battellino said Australian banks’ direct exposure to Europe remains low, with claims on euro-area countries amounting to A$87 billion, or 2.7 percent of total assets. Eighty percent of that exposure is to Germany, France and the Netherlands, he said, adding that the euro area accounts for only about 4 percent of Australia’s merchandise exports.
Battellino noted that, in Australia, business confidence is a little below average at present, though it has improved in recent months. “The gradual spread of the benefits of the resource boom is helping to sustain business confidence in the face of the worsening European situation,” he said.
In contrast, Heather Ridout, chief executive officer of the Australian Industry Group who will join the board of the RBA on Feb. 14, said yesterday that the gap between resource-related industries and other companies remains wide.
“Twenty percent of this economy is growing by 15 percent, and 80 per cent is growing by 1 percent,” she told Australian Broadcasting Corp. radio in an interview. “The high dollar, the weakness in the housing industry, the consumer caution, the structural changes happening not just in manufacturing and tourism, but also in say retailing, in online purchasing and changing consumer taste, all these issues have distorted the” distribution of the benefits of growth, she said.
The RBA lowered the overnight cash rate target to 4.25 percent from 4.5 percent on Dec. 6, after cutting it to 4.5 percent from 4.75 percent on Nov. 1. Traders are betting it will cut borrowing costs again at the central bank’s next meeting in February, interbank cash-rate futures show.
A private survey today showed Australian consumer confidence dropped in December to a four-month low as concern mounted about rising unemployment and the fallout from Europe.
“I remain confident that Australia, with its strong government finances, resilient banking system, relatively low exposures to the troubled countries and strong links to the dynamic Asian region, is well placed to deal with events that may unfold,” Battellino said.
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