Gravity-Defying Aussie Gouges Industry as Prosperity Bites Back

Gravity-Defying Aussie Gouges Industry as Prosperity Bites Back

From skyrocketing rents in remote mining towns to the decline of the auto industry, Australia is grappling with the downside of world-beating economic growth that has driven the nation’s currency to record highs.

Policymakers and executives at the Bloomberg Australia Economic Summit in Sydney yesterday singled out the local dollar’s strength as the biggest challenge for business, while conceding there’s little that can be done to restrain it. Terry Davis, managing director at Coca-Cola Amatil Ltd., said the Aussie is “decimating” manufacturers, while Robert Mead, head of portfolio management in Sydney at Pacific Investment Management Co., said businesses are deferring spending.

Australia’s defiance of the global slowdown is now backfiring on manufacturing after the currency soared 75 percent against the U.S. dollar and 87 percent versus the yen from its low in October 2008 after the collapse of Lehman Brothers Holdings Inc. roiled financial markets. The government and Reserve Bank of Australia say the cash flowing into the economy — fueled by quantitative easing in the U.S. and Japan — is beyond the control of policy makers in a small nation.

“That’s the hand that the world has dealt us,” RBA Assistant Governor for economics Christopher Kent said at the summit, reiterating that the central has no plans for intervention to weaken the so-called Aussie. “Businesses in a number of industries are under quite a deal of pressure — part of that’s because of the exchange rate.”‘Defying Gravity’

Treasurer Wayne Swan said the Australian dollar is “defying gravity” as commodity prices fall.

“The global economy requires the big economic engines to grow so we can all grow together, and if that requires expansionary monetary policy because fiscal policy has reached its limits or can’t be implemented then so be it,” he said.

Australia’s economy expanded 3.6 percent in 2012, the fastest pace in five years, while employers added 71,500 jobs in February, the most in almost 13 years, government data showed last month.

Clouding the outlook, BHP Billiton Ltd. (BHP) Chief Financial Officer Graham Kerr told the conference he expects annual economic growth in China to moderate toward 6 percent, and that prospects in its largest customer present the company’s main business risk.

The Australian dollar touched $1.0525 yesterday, the highest level since Jan. 24, extending the longest stretch above parity with the U.S. dollar since it was freely floated in 1983. The RBA’s trade-weighted index climbed to 79.9 yesterday, the highest level since 1985.

Holden Cuts

“While the Aussie dollar’s at $1.05ish, the investment decisions are being delayed,” Pimco’s Mead said.

“This continued strength of the Australian dollar is just decimating domestic manufacturers that face strong import competition,” Coca-Cola Amatil’s Davis said.

General Motors Co.’s Holden division said this week it will cut about 500 jobs in Australia, citing the local dollar’s strength, and currency devaluations in competing markets.

The central bank cut rates by 1.75 percentage points in six steps in the 14 months through December as policy makers try to rebalance a two-speed economy where mining regions in the north and west thrive off Chinese demand, while manufacturing and tourism in the south and east struggle. The RBA left borrowing costs unchanged at 3 percent this year, saying earlier reductions are gaining traction with households.

Productivity Growth

“Some of the businesses, it’s very unfortunate, but those that are not doing well and are not surviving, they go out of business,” the RBA’s Kent said. “But new ones come in, and those that go out of business tend to be less efficient than those that they’re being replaced by, that’s the natural process through which productivity growth occurs.”

Warwick McKibbin, a former member of the RBA’s board, said at the conference yesterday that the distortionary effects of monetary policy need to be taken into account.

“Monetary policy can’t do everything,” said McKibbin, chair in public policy at the Australian National University’s center for applied macroeconomic analysis. “All monetary policy does is it moves demand around through time. It doesn’t create things. When the central bank starts to cut rates too much, it distorts the economy, it distorts the allocation of capital.”

Australia’s prosperity is luring international buyers to the property market. A National Australia Bank Ltd. (NAB) survey of developers found that foreign buyers of new properties made up about 9 percent of total purchases, chief economist Alan Oster told the conference. “It’s probably going up now.”

No Dividend

In the northwest town of Port Hedland, the housing situation is very different from two decades ago. Then, houses were very hard to shift, said BHP’s Kerr, who was charged with selling houses in the town after he joined the Melbourne-based company as a graduate trainee in its iron ore unit.

As mining has boomed, Prime Minister Julia Gillard’s government hasn’t reaped electoral dividends because the opposition positioned itself as pro-resources and opposed new taxes on coal and iron-ore profits. In the manufacturing heartlands of Sydney, Melbourne and Brisbane — where Labor traces its origins and historically has been strong — growth and employment have been hampered by the local dollar’s ascent.

The number of manufacturing workers, traditionally supporters of the union-financed Labor Party, has slumped 10 percent since Labor won office to 941,400 in February, the lowest since the data series began in 1984.

Iconic Failures

In western Sydney, Australia’s largest manufacturing region, unemployment in some areas is as high as 14 percent as iconic local companies such as saucemaker Rosella lose the battle against rising costs and cheaper imports.

At a state level, Labor was ejected from office in New South Wales after 16 years in 2011, winning just 25.6 percent of the vote. Liberal Premier Barry O’Farrell told the conference he expects federal opposition leader Tony Abbott will sweep the region in the Sept. 14 election.

“My prediction — not novel, not news breaking — is that Tony Abbott is going to win the federal election in Sydney’s west with much the same margin that we won seats in March of 2011,” O’Farrell said.

Paul Howes of the Australian Workers Union said the economy’s changes are different to the removal of industry protection overseen by a Labor government in the 1980s when fallout from change was planned.

“What we’ve experienced in the last five years with the dollar is essentially going through uncharted water, with no clear idea of where we come out on the other end,” Howes, national secretary of the AWU, told the conference.

To contact the reporter on this story: Michael Heath in Sydney at mheath1@bloomberg.net