A Weaker Currency Is No Longer Economic Elixir It Once Wasby and
Goldman says trade volumes less sensitive to exchange rates
Japan, U.K. show limits of weaker currency on boosting growth
A weaker currency, once the cure-all for ailing economies around the world, isn’t the panacea it once was.
Just look at Japan, where the yen plunged 28 percent in the two years through 2014, yet net exports to America still fell by 10 percent. Or at the U.K., where the pound’s 19 percent tumble in the two years through 2009 couldn’t stave off a 26 percent decline in shipments to the U.S. In fact, since the turn of the century, the ability of exchange-rate movements to affect trade and growth in major economies has fallen by more than half, according to Goldman Sachs Group Inc.
The findings suggest that weaker currencies may not provide much assistance to officials in countries like Japan and the U.K. that are relying on unprecedented easy-money policies to help boost tenuous growth and inflation. On the flip side, the data also indicate that concerns the U.S. recovery will be derailed as rising interest rates drive investors into the dollar are also overblown. A shift in the structure of advanced-economy trade to less price-elastic goods and services, combined with the prolonged effects of the financial crisis, have stunted the sensitivity of trade volumes relative to global exchange rates, according to Goldman Sachs analysts led by Jari Stehn.
“If you’re a central banker, yes you’re paying attention to currency levels, but the more-developed market economies aren’t reacting to currency debasing policies like they used to,” said Philippe Bonnefoy, the founder of Switzerland-based hedge fund Eleuthera Capital AG. “The impact has been diluted.”
The yen advanced 0.6 percent Monday to 100.39 per dollar as of 10:04 a.m. in New York. The Bloomberg Dollar Spot Index fell 0.2 percent, resulting in a 4 percent drop this year.
Global central banks have cut policy rates 667 times since 2008, according to Bank of America Corp. During that period, the dollar’s 10 main peers have fallen 14 percent, yet Group-of-Eight economies have grown an average of just 1 percent, according to data compiled by Bloomberg.
Since the late 1990s, a 10 percent inflation-adjusted depreciation in currencies of 23 advanced economies boosted net exports by just 0.6 percent of gross domestic product, according to Goldman Sachs. That compares with 1.3 percent of GDP in the two decades prior. U.S. trade with all nations slipped to $3.7 trillion in 2015, from $3.9 trillion in 2014, according to data compiled by Bloomberg.
“The foreign-exchange markets have shown some out-sized moves in recent years, and most macroeconomic models suggest that these moves should have large effects on growth,” Stehn wrote in a note to clients. “The recent experience casts some doubt on this view. Exports have become less sensitive to exchange rate changes over time, while imports do not show a significant response to the exchange rate.”
Japan has stepped up its use of unconventional monetary tools, including negative rates and quantitative easing, to try to stimulate its economy since the election of Prime Minister Shinzo Abe in 2012. The central bank fine-tuned its stimulus polices last week to target the shape of the Japanese government bond yield curve rather than focus on expanding the money supply. Yet, the nation’s economy is forecast to expand just 0.6 percent in 2016.
What’s more, the yen has gained 20 percent versus the dollar this year, showing that not only are the economic effects of currency depreciation waning, but the central bank’s ability to weaken the exchange rate is ebbing too.
“Currency rates can still play a significant role, but require companies and investors to believe that exchange-rate changes are permanent rather than temporary,” said Mansoor Mohi-uddin, a Singapore-based strategist at Royal Bank of Scotland Group Plc. “Companies need to believe that central banks will keep exchange-rates weak before they change their investment patterns. If the central bank’s commitment is questioned, like in Japan, companies will not believe exchange rate weakness will continue.”
While the 13 percent plunge in the pound since the U.K. voted to leave the European union in June would traditionally be seen as cushion for the the economy, the impact may be muted, according to Timothy Graf, head of macro strategy for EMEA at State Street Global Markets.
Forecasts in the latest Bloomberg monthly poll show that recent signs of strength haven’t dissuaded economists from the view that there will be a sharp cooling in growth in 2017. They see the pace slipping to just 0.7 percent from 1.7 percent this year. That would be the worst performance since 2009, when the economy was last in recession.
“It will be more like following the financial crisis where you did get a little bit of a bump, but it really wasn’t that appreciable,” Graf said from London. “You didn’t see any narrowing of the U.K. trade balances. It didn’t really change the balance of trade for the U.K.”