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Mid-market businesses untroubled by high Australian dollar

Mid-market businesses untroubled by high Australian dollar

Reserve Bank governor Glenn Stevens might not like a high Australian dollar, but many business people are not nearly as concerned.

A new report has found that the majority of mid-sized businesses, who are not as exposed to the dollar as resource-rich exporters, are not fazed by a high Aussie, with 54 per cent saying the $A will have no impact on their competitiveness.

The Commonwealth Bank of Australia Future Business Index found that around 85 per cent of business leaders thought that the exchange rate will have no impact on their future labour hiring or capital spending plans. The value of the businesses surveyed ranged from $10 million to $100 million.

The ongoing strength of the Australian dollar remains a significant concern for export-oriented industries, particularly the wholesale, retail and manufacturing industries. The currency is trading around US94¢ and has been above US90¢ since early March. Prior to this, the Aussie spent a good three years sitting near parity against the US dollar before falling in April 2013.

“A high Australian dollar hurts ­exporters in terms of the Aussie dollar value of their export receipts plus any loss of market share due to cost pressures,” said Westpac senior currency strategist Sean Callow.

“It also hurts Australian companies competing with imports such as retailers unable to match foreign goods prices.”

But for many other businesses who are not trade-exposed, a strong $A cuts their import costs and makes things like petrol prices or imported machinery cheaper than they would be otherwise.

Business expects the $A to trend lower


The CBA survey also found that most mid-market businesses expect the dollar to trend lower over the months ahead and the consensus suggests it will remain at a level some consider uncomfortably high.

“They are probably less exposed to the Australian dollar given they typically focus on the domestic market rather than offshore. I think the survey is also picking up the fact that a high $A also has some benefits – imported inputs and capital goods are cheaper for example,” CBA chief economist Michael Blythe said.

“I think the Reserve Bank’s push for a lower Australian dollar is more to do with the income side of the equation. We are getting less of an income boost from our resource exports because the AUD is not offsetting lower US dollar prices.”

The Reserve Bank has consistently said that the local currency is trading above its comfort zone and the level needed to help the economy rebalance from one that has derived the bulk of its income from resources.

Recently speaking in Hobart, RBA’s Stevens said there was little doubt that ­significant parts of the trade-exposed ­sectors still find the currency quite uncomfortable as it “continues to exert acute pressure for cost containment, productivity improvement and business model change”.

Indeed, the minutes of the RBA’s July board meeting also stated that the exchange rate remained high by historical standards, particularly given the declines in key commodity prices, and was therefore offering less assistance than it otherwise might in achieving balanced growth in the economy.

“The currency does still seem to be acting as a brake on the economy,” said Callow, adding that Westpac Banking Group is expecting 3.2 per cent GDP growth in 2014 and a further 3 per cent in 2015.

“It is clear that the economy can still manage to post reasonable growth despite persistent AUD strength. Part of this will be reflecting another factor Stevens identified in Hobart: a number of sectors are making serious efforts to contain costs and lift productivity,” said Callow.

A growing number of mid-market businesses have responded to the high currency by hedging their currency exposure, limiting the impact of future exchange rate fluctuations.

Ben Eade executive director of Manufacturing Australia said the longer the Australian dollar remains high, the worse off the broader economy would be.

“Some businesses won’t sustain the high dollar over time and there is a real risk that it could lead to a hollowing out of the economy, and when the dollar does eventually depreciate, we will not have the industry structure that we have today,” he said.

“One of the biggest concerns for manufacturers is input costs: raw materials, labour, transport and energy. That cost base is often measured relative to the US dollar, the euro or the pound, so a high currency makes high input costs an even greater burden, and conversely easing the dollar would go some way towards reducing input cost pressures.”


*Original Article by Bianca Hartge-Hazelman:

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