Last night’s fall in the Australian dollar is a warning of much steeper falls to come. Only one possible 2014 event can save the dollar – massive Chinese buying of our assets, particularly residential real estate.
So today I am going to list nine reasons why the dollar is falling and going to fall further in the coming years.
While many will celebrate a lower dollar, many of those underlying reasons are predictions of harder times ahead.
Do not be fooled if the dollar suddenly bounces back in coming days. Any time there is a sharp fall shorters give the currency an extra nudge down and when they cover it causes a rebound, sometimes accelerated by speculative short-term buying.
So here are my nine reasons:
1. In the next few months Americans will discover that quantitative easing is actually lowering US employment. Yesterday’s commentary was a vital benchmark commentary in what is happening and going to happen (A world-class flaw in the Fed's jobs plot, November 21).
The tapering of quantitative easing in 2014 will see US interest rates and the US dollar rise. To the extent that the Australian dollar falls as part of this process it represents good news. The other eight forces are not as good.
2. Australia currently rides on the back of three sheep: iron ore, LNG and coal. Iron ore will be the best of these three but will depend on a fickle Chinese market. Coal, particularly thermal coal, is headed for even tougher times. A lot more mines will shut. I think LNG is going to struggle because of the effect of low cost US energy but even if the price holds we are a high cost producer and the capital cost overruns in our new LNG developments will mean that depreciation costs slash taxable profits.
3. We have priced ourselves out of the market in new LNG projects. Gina Rinehart seems determined to go ahead with Roy Hill in iron ore. Everyone else is simply cutting costs. New mining development is close to dead. Our current dollar has been boosted by enormous sums coming in to fund the LNG projects and other developments. That is set to run down rapidly.
4. As the mining projects run down some 150,000 workers will need to find work. Infrastructure investment will help but there are another 100,000 to 150,000 likely to be lost in the retail industry as a result of the big jump in shift allowances coming on July 1, 2014 and the rise of internet shopping. On top of this there are large numbers to go in the public service. The Abbott government seems grimly determined to shut down the motor industry at exactly the wrong time so another 150,000 people will lose their jobs – call it a total of 400,000 people to be conservative (Four sharp pains to business confidence, November 13).
The shutting down of motor will be correctly blamed on the Abbott government but it will also then (unfairly) get the blame for everything else. The unemployment rise will intensify speculation that Abbott is a one-term government and that will lower the dollar as the 2015 election approaches.
5. Australian companies have fallen behind US companies in productivity, and the industrial relations laws were a poison pill for the Abbott government. They can’t change them significantly and Australian corporate management does not know how to use the Abbott antidote for the poison – independent contracting.
6. The ageing of the workforce is gathering momentum and causes less people to be involved. While this lowers the participation rate and masks real unemployment, it means taxation revenues are curbed. (Australia's irrevocable, inevitable growth challenge, 15 November)
7. Revenue will also be affected by the end of the carbon tax and the need to spend money on carbon reduction via the direct action program.
8. Australia, inspired by the mining investment boom, set sail on massive rises in expenditure on health, disability and education. The only way to do that at a time of limited rises in income is to run large deficits. Not good for the dollar.
9. On the east coast Australia has arranged to export more gas than it should have. That means there will be a scramble to find more gas. While over time we will find the required gas it will come at a much higher price. This will affect the competitiveness of a large number of Australian businesses and underpin cost increases in industry and among consumers. This is a dreadful legacy of the Gillard and Rudd governments.
In theory the lower dollar will help a large number of companies. It will certainly accelerate the agricultural boom and help areas like education and tourism. But so many other industries, including the building industry, are now hooked on imports, which will rise in cost. In turn these cost pressures will affect the dollar.
The lowering of the dollar is part of the adjustment process. My greatest fear is that it will be delayed by a rush of Chinese investment. We will then not make the required adjustments and they will be so much more painful when they take place.