The Australian Dollar has once again dropped to a new 6 year low against the US Dollar. The Aussie Dollar dropped sharply yesterday, at one point trading as low as US 69.85 The sudden drop was due to the release of the Australian GDP results for the June Quarter. Australian GDP growth was below expectations at 0.20%, this is the lowest it has been in over four years. The slow down is due to a slowing resources market and reduced investment activity from the business sector.
The worse than expected GDP result has increased speculation that the Reserve Bank of Australia may cut the official cash rate for a third time in 2015. The RBA cash rate is currently sitting at 2.00%, which is a historic low. The Australian Dollar has been under pressure for the past 12 months and we have seen the foreign exchange rate fall by more than 20% in the past 12 months.
Australia Close to Recession
An economy goes into recession if it has two consecutive quarters of negative GDP growth. The Australian economy has experienced 24 years of growth. We have not experienced a recession since the early 1990's. The signs are suggesting that our golden run could be close to an end. Nominal GDP growth for the financial year (ending June 30th), is the lowest it has been in more than 50 years. Australian GDP grew more during the financial years of the 'Recession we had to have'
Australia is also suffering from diminishing terms of trade. China slowing, is hurting the Australian Economy. Demand for Australian exports is falling. The resources boom is coming to an end, and the Australian economy needs to adjust to a world after the boom. We can no longer rely on the mining sector to fuel economic growth.
Can a Falling Dollar Save Australia From a Recession?
The Australian Dollar has fallen almost 15% in 2015, and we are frequently reporting new 6 year lows. The forecast for the Australian Dollar, is for more of the same. Unless there is a significant change, we expect that the AUD will keep falling and we will have to adjust to a foreign exchange rate in the 60s. A lower Australian Dollar is not all bad news.
As our local currency falls, this will make our exports more attractive to the rest of the world. Our tourism and agricultural exporters will find that a lower Aussie Dollar makes their products and services more competitive in the international market. Their can charge the same prices in the local currency, while their customers get a foreign exchange driven price reduction.
As our exports become cheaper, our imports will become more expensive. This makes Australian made products more competitive, which will hopefully lead to us using them in favour of imported alternatives. A falling local currency will encourage us to improve our terms of trade, and stimulate domestic GDP growth.
What do you think? Will the Australian Dollar keep falling? Can Australia avoid going into recession? We'd love to hear your thoughts in the comment section below.