Mar 2, 2005

Australia at a Crossroads

This is what happened to Australia's currency last night.
The Reserve Bank of Australia (RBA) today raised official interest rates by 25 basis points to 5.5%, just hours before national accounts estimates reported that the economy grew by a dismal 0.1% in the December quarter 2004. This slowed annual GDP growth down to just 1.5%, very low by recent standards. Exports were a big drag on the economy, coupled with falling inventory levels. (from New Economist)
I also ran across this yesterday detailing some other long-term problems the currency may have.
The current account deficit has grown to more than 7 per cent of the economy for the first time in half a century, as the nation racks up foreign debt to pay for consumers' hunger for imports.
The deficit in the last three months of 2004 totalled an estimated 7.1 per cent of gross domestic product, far larger than that which prompted the warning by the then treasurer, Paul Keating, in 1986 of Australia becoming a "banana republic".
And if not for very favourable trade prices, the deficit would have been far higher than $15.2 billion.
The shortfall is one item in a trifecta of economic and political headaches for the Government. (from The Sydney Morning Herald)
Australia seems to be at an interesting monetary crossroads. On one hand their economy is slowing but on the other they have a perceived real estate bubble and strong consumption based on borrowing.

I thought last year that Australia's economy would slow as the result of rate hikes and that rate cuts and currency weakness would be the outcome. I would still rather sell the AUD than own it but I guess it will be the economic weakening that brings the currency down rather than rate cuts. I also wonder if they will see a knock on effect from any U.S. problems just because of similar current account structure.

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