Aussie hampers transition
The RBA has continually talked down the dollar and has been using all the tools at its disposal, barring direct intervention, to push the currency lower.
"Due to elevated cost structures and a high exchange rate, Australia Inc is increasingly unable to compete in a fiercely competitive global market," said Pimco, the manager of the world's biggest bond fund, in its Australia Inc report released on Wednesday.
The retail and housing sectors, which the RBA had hoped would pick up the slack after mining capital expenditure peaked, have shown shoots of growth but aren't ready to steer the Australian economy.
In the year to September, growth in business investment in Australia outside the mining sector was near non-existent at about 0.5 per cent, Pimco said. "Although hard to quantify, this investment drought ... has likely been influenced by a lingering risk aversion after the financial crisis as well as the political uncertainty that has been common in many developed countries ... "
Throw in the high exchange rate, making Australian exports more expensive overseas and imports cheaper for domestic consumers, and local businesses are caught between a rock and a hard place.
"Historically, it has taken two years or so for the transition mechanism between the exchange rate and the real economy to work, meaning the full impact of this year's currency depreciation is unlikely to be felt before 2015," the firm said.
Frequently Asked Questions about this Article…
The high Australian dollar is a concern because it makes Australian exports more expensive overseas and imports cheaper for domestic consumers. This situation hampers local businesses' competitiveness in the global market.
The Reserve Bank of Australia (RBA) is using various tools, except direct intervention, to push the currency lower. They have been consistently talking down the dollar to ease the transition of the economy away from mining.
The high exchange rate is making it difficult for Australian businesses to compete globally due to elevated cost structures. It also makes exports more expensive and imports cheaper, putting local businesses in a challenging position.
The RBA hoped that the retail and housing sectors would pick up the slack after mining capital expenditure peaked. However, while these sectors have shown growth, they aren't yet ready to steer the Australian economy.
As of the year to September, growth in business investment in Australia outside the mining sector was nearly non-existent, at about 0.5 percent. This investment drought is influenced by lingering risk aversion and political uncertainty.
Historically, it takes about two years for the transition mechanism between the exchange rate and the real economy to work. Therefore, the full impact of this year's currency depreciation is unlikely to be felt before 2015.
The investment drought in Australia is likely influenced by lingering risk aversion following the financial crisis and political uncertainty common in many developed countries.
Local businesses face the challenge of being caught between a rock and a hard place, as the high exchange rate makes exports more expensive and imports cheaper, affecting their competitiveness.
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