Aussie Float Architects Urge Devaluing 30 Years After Peg
Architects of the float of Australia’s dollar, trading at a similar level to when exchange controls were lifted 30 years ago, say the currency must devalue and economic reform be renewed to avert a recession.
Peter Jonson, who advised the central bank chief of the time, and Ross Garnaut, who counseled then-Prime Minister Bob Hawke, say the resource investment boom has rendered Australia uncompetitive. General Motors Co. this week cited an elevated exchange rate in deciding to stop making iconic Holden cars in the nation, as did Qantas Airways Ltd. on Dec. 5, when it flagged a record first-half loss and 1,000 job cuts -- announcements that echoed the economy’s early 1980s malaise.
“There are some quite strong parallels,” said Jonson, a former head of the Reserve Bank of Australia’s research department who has observed the nation’s economy for more than 40 years. “When you look at Qantas, look at the vehicle industry, look at manufacturing generally, look at education, look at tourism, it’s a tough time.”
The Aussie is trading at about 90 U.S. cents, around the level in 1983 when Hawke’s government removed exchange controls and embarked on an economic overhaul that freed up the finance industry, cut tax rates and slashed tariffs. Garnaut and Jonson now call for the government to moderate spending, lawmakers to scrap taxes they say deter investment and employers to keep wage gains at less than the pace of inflation.
The Aussie’s strength has “made everything uncompetitive in Australia except pulling iron ore and coal out,” said Garnaut. “A big adjustment in the exchange rate has to be part of the improvement in competitiveness.”
The Australian dollar surged almost 50 percent against the greenback from 2009 to 2012, making exports less competitive and boosting the appeal of imports. It has dropped about 13 percent in 2013 as the economy grew below its average of the past 10 years, prompting the RBA to cut interest rates to a record-low 2.5 percent to support demand.
Paul Keating, Australia’s treasurer in 1983 who oversaw the float, addressed Labor lawmakers in parliament today, saying the decision “completely changed the place,” referring to the country and the party he would go on to lead.
“We gave up rowing the boat, but we took up steering the boat,” he told the Labor caucus, three months after the party lost office at an election. “If you want to steer the boat, you’ve got to have the instruments in a flexible position. And what we gave Australia was that flexibility, and we gave it through imagination, and I might say, some courage.”
Australia’s jobless rate rose to 5.8 percent in November, matching the highest level since 2009, government data showed today. The Treasury projects unemployment will rise to an 11-year high 6.25 percent by June.
Qantas, Australia’s largest carrier, is on track for a record loss, analysts predict, amid a market share fight with Virgin Australia Holdings Ltd. Qantas’s credit rating was cut to junk at Standard & Poor’s on Dec. 6.
General Motors’s Holden unit will cease making cars in Australia in 2017, with about 2,900 employees set to lose their jobs at the automaker’s plants in South Australia and Victoria. Coming after Ford Motor Co.’s May announcement that it will exit in 2016, GM’s decision raises risks to the sustainability of the supply chain for the third carmaker in Australia, Toyota Motor Corp.
“Our cost base is so far out of line that short of an accord or something to help get a more sensible cost base, there’s only one other way to fix it and that’s to have a recession,” Jonson said, which would drive the currency lower. Large companies should limit or freeze salaries and work with the government to bring overall labor costs down, he said.
It costs an average A$3,750 ($3,382) more to build cars in the country than at GM plants overseas, Holden said in a Nov. 27 submission to a government inquiry into the industry.
The Treasury’s top economic forecaster, David Gruen, projects Australia could have the weakest income growth in half a century in the next 10 years unless productivity picks up. Labor productivity will need to improve by an average 3.2 percent per year for a decade -- something never achieved -- to sustain current income growth rates, according to Gruen.
“We’ve tended to slacken off a fair way over the course of the past decade,” said Stephen Roberts of Laminar Group, who worked as an economist on the 1979-1981 Campbell Inquiry that recommended the currency float. “There is some symmetry between now and 1983, and hopefully like then, this is the start of a much stronger focus on economic reform.”
Australia had been well served by its free-trading currency, which weakened through the dot-com crash, Asian financial crisis and global credit squeeze, helping maintain an uninterrupted 22-year expansion. As growth slowed this year, its buffer role has been undercut by the near-zero interest rates of major global central banks which boosted the Aussie’s appeal and hampered RBA Governor Glenn Stevens’s bid to stimulate non-mining areas of the economy.
“It’s become a shock-absorber,” Jonson said of the floating currency. “The trouble is, it’s gotten itself stabilized too high right now and for the first time since the float we’ve got to think of alternative policies.”
Stevens last month put currency traders on notice when he said that, while the benefits of intervention haven’t “so far” outweighed the costs, it “doesn’t mean we will always eschew” currency sales. “In fact we remain open-minded on the issue,” he told a forum of economists Nov. 21.
Jonson, Garnaut and Roberts, with more than a century of analyzing Australia’s economy between them, have various policy prescriptions.
Roberts wants better links between what students are taught and what skills the economy needs, and improved financing for startup businesses.
In a 7,000-word address titled “Ending the Great Australian Complacency of the Early Twenty-First Century” to the University of Melbourne in late May, Garnaut suggested policies to cushion a reduction in real wages while increasing incentives to work, as well as reform of the business and personal income tax systems to encourage investment and employment.
Garnaut and Jonson say the government needs to begin communicating to the electorate that times are going to get tougher and hard choices to cut spending need to be made.
The government will release its mid-year economic forecasts on Dec. 17 that may show a budget deficit 45 percent bigger than an August estimate. The underlying cash shortfall will probably be A$43.5 billion in the 12 months through June 30, according to the median estimate of eight financial companies surveyed by Bloomberg News. Treasury forecasts on Aug. 13 saw a A$30.1 billion gap.
“Unless we get back to productivity growth, back to some serious choices about economic policy, it’s not going to last much longer,” Garnaut said of Australia’s 22-year expansion.
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