Identifier
Created
Classification
Origin
09CANBERRA1024
2009-11-20 07:59:00
UNCLASSIFIED//FOR OFFICIAL USE ONLY
Embassy Canberra
Cable title:
HIGHER AUSTRALIAN DOLLAR MAY LEAD TO STRUCTURAL CHANGE
how-toVZCZCXRO3532 RR RUEHPT DE RUEHBY #1024/01 3240759 ZNR UUUUU ZZH R 200759Z NOV 09 FM AMEMBASSY CANBERRA TO RUEHC/SECSTATE WASHDC 2259 INFO RHEHAAA/WHITE HOUSE WASHINGTON DC RHMFISS/DEPT OF ENERGY WASHINGTON DC RUCPDOC/DEPT OF COMMERCE WASHINGTON DC RUEATRS/DEPT OF TREASURY WASHINGTON DC RUEHBJ/AMEMBASSY BEIJING 9639 RUEHBN/AMCONSUL MELBOURNE 6791 RUEHPT/AMCONSUL PERTH 5057 RUEHDN/AMCONSUL SYDNEY 5059
UNCLAS SECTION 01 OF 02 CANBERRA 001024
SENSITIVE
SIPDIS
DEPARTMENT FOR EEB/IFD, EEB/ESC/IEC, EEB/CIP/BA
DEPARTMENT FOR EAP/ANP
E.O. 12958: N/A
TAGS: EFIN EMIN ECON ETRD PGOV AS
SUBJECT: HIGHER AUSTRALIAN DOLLAR MAY LEAD TO STRUCTURAL CHANGE
UNCLAS SECTION 01 OF 02 CANBERRA 001024
SENSITIVE
SIPDIS
DEPARTMENT FOR EEB/IFD, EEB/ESC/IEC, EEB/CIP/BA
DEPARTMENT FOR EAP/ANP
E.O. 12958: N/A
TAGS: EFIN EMIN ECON ETRD PGOV AS
SUBJECT: HIGHER AUSTRALIAN DOLLAR MAY LEAD TO STRUCTURAL CHANGE
1. (SBU) SUMMARY: Underpinned by strong demand for Australian
resources, a resilient post-GFC domestic economy, rising interest
rates, and comparatively slower recoveries among other advanced
economies, the Australian dollar (A$) has been one of the strongest
currencies in 2009. The strong dollar, however, is exerting
pressure on export-oriented sectors. The higher A$ is likely to
shift resources from manufacturing to higher growth industries, such
as the resources and energy sector, causing uneven effects across
Australia. END SUMMARY.
Aussie Dollar: Sharp Rise
2. (U) The Australian dollar (A$) appreciated by about a third in
2009, from a low USD 63 cents in March 2009 to above USD 94 cents at
the beginning of November. It appreciated similarly against other
currencies. Some analysts consider parity with the U.S. dollar
likely during the next three to six months.
Higher Interest Rates Support A$
3. (SBU) Australia was the first advanced economy to raise interest
rates after the GFC, which it did in October and November 2009.
Australian dollar-denominated investments are likely to remain in
high demand because they offer better returns than their counterpart
USD, British pound or yen-denominated investments. Most economists
assess that as long as economic recovery keeps lagging elsewhere,
particularly in the U.S., interest rate differentials with Australia
- which support a strong A$ -- should persist.
Strong A$ Should Accelerate Structural Change
4. (SBU) Deputy Treasury for Macroeconomic Policy David Gruen told
Econoff that a higher A$ will inevitably shift resources from
sectors such as manufacturing, agriculture, tourism and education
towards higher-growth export industries, such as resources and
energy. Reserve Bank Governor Stevens and Trade Minister Crean also
acknowledge the strong A$ is adversely affecting non-resource
exporters.
5. (SBU) Gruen anticipates sensitivity to a higher A$ will vary
across regions in Australia. For instance, resource industries,
mainly located in the states of Western Australia and Queensland,
have offset the impact of the stronger A$ with higher export
volumes, especially to China. New South Wales and Victoria,
however, where manufacturing is more prevalent, face a contracting
sector. Implications of the stronger A$ on important Australian
economic sectors (manufacturing, agriculture and resources) are
described below:
Manufacturing
--------------
6. (SBU) Cheaper imported inputs and machinery help partly offset
lower export earnings, but not enough. Employment in manufacturing
fell 2.8% in the year to August 2009 and currently accounts for 9.5%
of the total workforce, down from 9.7% in the same quarter 2008.
Industry Minister Kim Carr said, "We can't sustain this approach.
Countries that have lost all their manufacturing are now desperate
to re-establish it." Australian Industry Group Senior Economist
Martin Petch told Econoff some sectors have adjusted or moved
production offshore. The two leading manufacturing unions have
already called for greater government assistance.
Agriculture
7. (SBU) The Australian Bureau of Agricultural and Resource
Economics (ABARE) forecasts a decline of 3.4% in export returns from
QEconomics (ABARE) forecasts a decline of 3.4% in export returns from
farm commodities in 2010. As in manufacturing, the strong dollar
enables cheaper imported inputs, which partly offset lower export
earnings and help lower some agriculture and food costs
domestically. ABARE Chief Commodities Analyst Dr. Jamie Penm told
Econoff that imports of inputs account for only 20% of farm costs.
Resources
8. (SBU) According to Penm, 2009-10 export returns from commodities
are expected to fall by 24% due to the appreciation of the A$ and
CANBERRA 00001024 002 OF 002
lower contract prices -- traded in U.S. dollars -- for bulk
commodities (such as coal and iron ore, which today represent almost
40% of Australian exports). The sector has offset lower A$ returns
by selling higher volumes, especially to China. The higher A$ also
enables firms to more easily import capital equipment and expand
capacity. Mine production in 2009-10 is forecast to increase by
4.6%.
9. (SBU) COMMENT: The high dollar is expected to support a
restructuring of the Australian economy, resulting in a
substantially smaller traditional manufacturing sector and an
expanded resources and energy sector. This may put political
pressure on Prime Minister Rudd, who pledged the day he became ALP
leader: "I don't want to be Prime Minister of a country that
doesn't make things anymore."
CLUNE
SENSITIVE
SIPDIS
DEPARTMENT FOR EEB/IFD, EEB/ESC/IEC, EEB/CIP/BA
DEPARTMENT FOR EAP/ANP
E.O. 12958: N/A
TAGS: EFIN EMIN ECON ETRD PGOV AS
SUBJECT: HIGHER AUSTRALIAN DOLLAR MAY LEAD TO STRUCTURAL CHANGE
1. (SBU) SUMMARY: Underpinned by strong demand for Australian
resources, a resilient post-GFC domestic economy, rising interest
rates, and comparatively slower recoveries among other advanced
economies, the Australian dollar (A$) has been one of the strongest
currencies in 2009. The strong dollar, however, is exerting
pressure on export-oriented sectors. The higher A$ is likely to
shift resources from manufacturing to higher growth industries, such
as the resources and energy sector, causing uneven effects across
Australia. END SUMMARY.
Aussie Dollar: Sharp Rise
2. (U) The Australian dollar (A$) appreciated by about a third in
2009, from a low USD 63 cents in March 2009 to above USD 94 cents at
the beginning of November. It appreciated similarly against other
currencies. Some analysts consider parity with the U.S. dollar
likely during the next three to six months.
Higher Interest Rates Support A$
3. (SBU) Australia was the first advanced economy to raise interest
rates after the GFC, which it did in October and November 2009.
Australian dollar-denominated investments are likely to remain in
high demand because they offer better returns than their counterpart
USD, British pound or yen-denominated investments. Most economists
assess that as long as economic recovery keeps lagging elsewhere,
particularly in the U.S., interest rate differentials with Australia
- which support a strong A$ -- should persist.
Strong A$ Should Accelerate Structural Change
4. (SBU) Deputy Treasury for Macroeconomic Policy David Gruen told
Econoff that a higher A$ will inevitably shift resources from
sectors such as manufacturing, agriculture, tourism and education
towards higher-growth export industries, such as resources and
energy. Reserve Bank Governor Stevens and Trade Minister Crean also
acknowledge the strong A$ is adversely affecting non-resource
exporters.
5. (SBU) Gruen anticipates sensitivity to a higher A$ will vary
across regions in Australia. For instance, resource industries,
mainly located in the states of Western Australia and Queensland,
have offset the impact of the stronger A$ with higher export
volumes, especially to China. New South Wales and Victoria,
however, where manufacturing is more prevalent, face a contracting
sector. Implications of the stronger A$ on important Australian
economic sectors (manufacturing, agriculture and resources) are
described below:
Manufacturing
--------------
6. (SBU) Cheaper imported inputs and machinery help partly offset
lower export earnings, but not enough. Employment in manufacturing
fell 2.8% in the year to August 2009 and currently accounts for 9.5%
of the total workforce, down from 9.7% in the same quarter 2008.
Industry Minister Kim Carr said, "We can't sustain this approach.
Countries that have lost all their manufacturing are now desperate
to re-establish it." Australian Industry Group Senior Economist
Martin Petch told Econoff some sectors have adjusted or moved
production offshore. The two leading manufacturing unions have
already called for greater government assistance.
Agriculture
7. (SBU) The Australian Bureau of Agricultural and Resource
Economics (ABARE) forecasts a decline of 3.4% in export returns from
QEconomics (ABARE) forecasts a decline of 3.4% in export returns from
farm commodities in 2010. As in manufacturing, the strong dollar
enables cheaper imported inputs, which partly offset lower export
earnings and help lower some agriculture and food costs
domestically. ABARE Chief Commodities Analyst Dr. Jamie Penm told
Econoff that imports of inputs account for only 20% of farm costs.
Resources
8. (SBU) According to Penm, 2009-10 export returns from commodities
are expected to fall by 24% due to the appreciation of the A$ and
CANBERRA 00001024 002 OF 002
lower contract prices -- traded in U.S. dollars -- for bulk
commodities (such as coal and iron ore, which today represent almost
40% of Australian exports). The sector has offset lower A$ returns
by selling higher volumes, especially to China. The higher A$ also
enables firms to more easily import capital equipment and expand
capacity. Mine production in 2009-10 is forecast to increase by
4.6%.
9. (SBU) COMMENT: The high dollar is expected to support a
restructuring of the Australian economy, resulting in a
substantially smaller traditional manufacturing sector and an
expanded resources and energy sector. This may put political
pressure on Prime Minister Rudd, who pledged the day he became ALP
leader: "I don't want to be Prime Minister of a country that
doesn't make things anymore."
CLUNE