An export blueprint for tumultuous times
Exporters and economists differ on the value of the Australian dollar, but agree there's a plethora of growth opportunities for the Australian market, with surprising scope in Europe and the Middle East.
At meetings in Sydney, Melbourne and Brisbane, The Export Council of Australia and the Export Finance and Insurance Corporation met exporters from a variety of sectors. My fellow economist, Paul Bloxham from HSBC, and I were invited to discuss with them the outlook for exports, and we were joined by a series of exporter-commentators in each city – Marcus Moufarrige of serviced office company Servcorp, Nicholas Grzegorczyn of engineering company Gasco, and Justin Slaughter of primary produce firm Austrex.
We discovered that the view from the ivory tower and from the trenches can sometimes be the same – and sometimes differ.
Where were they the same? Despite some questions about the opportunities beckoning in Europe and Latin America, exporters and economists alike agreed that the main growth opportunities lie in 'Emerging Asia'. After all, this is the region where the complementarities with our trading partners are greatest; where our trade and investment ties are thickest; where the market penetration of many products is still minimal; and where the middle class and its discretionary income are growing in leaps and bounds.
Just as importantly, Asia is a region where broadly speaking one can do business, though obviously the political risks can't be overlooked.
What about Europe? Australians have been losing market share there ever since the GFC – the EU share of our total exports has shrunk from 14 per cent to 9 per cent. And the level of exports remains below its pre-GFC peak. Worst of all, the euro area debt crisis means that growth could remain flat, and the euro weak, for a decade at least.
The media might be reporting companies seeing value in European assets – such as Ansell – but our gatherings didn't turn up any cases other than this one.
As for Latin America, its share of our total exports remains low – under 2 per cent. We compete with it on world resource and agricultural markets, and do not (for the most part) supply what it demands.
One puzzle is why Australian resource and resource engineering companies have been able to mount such a push into Africa, yet lag in Latin America. Our discussion didn't get to the bottom of this, but I suggested three reasons – local incumbents (Petrobras, Vale, etc); a first-mover advantage of American, Spanish and Canadian companies; and resource nationalism in Argentina, Venezuela, Bolivia and Ecuador.
Our discussion of the Middle East and Gulf noted that the region isn't a prominent destination for our exports. Yet complementarities abound, and service exports seem to be growing rapidly.
We agreed Dubai is putting its financial crisis behind it. Far from being a mirage in the desert, as some claim, it has excellent long run potential, thanks to its strategic location and first-class infrastructure.
So where did the exporters and economists differ? On the value of the Australian dollar. Actually, we did agree on one thing – it makes sense to sell Asia the minerals and energy it is so willing to pay dearly for. Not to do so, for fear of ‘Dutch disease’ effects, would be like an athlete sacrificing the chance to compete in the Olympics because they would be unable to pursue their studies or career as single-mindedly.
But whereas the economists saw currency appreciation as a means by which the invisible hand of the market reallocates labour and capital to the resource from the non-resource sector, the exporters fretted that appreciation would squeeze industries that might never come back when the resource boom ends.
On the economists' side, the argument was: "Pegging the exchange rate is no cure-all – it would spur inflation. What exporters would gain on the exchange rate, they would lose through higher Australian dollar costs.
"Besides, in a globalised world, where companies have offshore affiliates and supply chains, the effects of appreciation are not all bad. Take Qantas. Appreciation makes its plane and fuel purchases more affordable and spurs outbound travel, even as it knocks inbound travel.
"Sure, there are losers and gainers from appreciation, but overall we have low unemployment (5 per cent) and low inflation (2 per cent)."
The exporters retorted: "But if the Australian dollar keeps rising, we won't have any non-resource industry left. We can't be just a quarry and gasfield for the rest of the world."
We discussed the argument of Warwick McKibbin that maybe now is the time to limit further appreciation, as central banks reportedly buy the Australian dollar while commodity prices sag. But no one was confident that the RBA would intervene quickly if the economy isn't obviously broken.
Overall, the mood was quietly optimistic, and for three reasons. First, the world economy can continue to grow briskly despite North Atlantic sluggishness – after all, it grew by 25 per cent over 2007-11, thanks mostly to Emerging Asia. Second, Australia's major trading partners are in that region. And third, if worse comes to worst, and the world does experience another 'Lehman moment', both Asia and Australia have the capacity to respond with policy stimulus to cushion any downturn.
Roger Donnelly is chief economist forEFIC.