Watch CBSN Live

An Expensive Lucky Country

Even volcanic ash can't stop my pommy mother from visiting her Aussie grandchildren, but this trip she'll notice what an expensive country Australia has become. Back in October 2008 she could have got $2.60 for each one of her British pounds. This trip she'll be lucky to get $1.65, making everything seem 50 percent more expensive. That inheritance fund will take quite a bashing this time round.

Inbound tourism feels the full impact of a strong Aussie dollar because so much of what is consumed is paid for locally, although it is countered somewhat by discount airfares. The upshot is that Australia will struggle to maintain visitor numbers this year and will almost certainly see a drop in visitor spend.

Of course, in theory, a strong dollar makes this a great time to be buy imports. Generally, import prices are 13 percent down over the last year according to the latest figures from the ABS (International Trade Price Indexes, Australia, Mar 2010 --- catalogue 6457). Whether these are always passed on by the retailer is doubtful, although the 25 percent drop in the price of imported clothes, toys, books and leisure goods might explain why it's been perpetual sale season at Myers and David Jones. Don't expect the same bargaining power for a new car though. They've dropped just 7 percent in the last year, and actually increased in price in the last quarter.

How a Weaker Dollar Saved Us This graph shows clearly how a weaker dollar late in 2008 allowed export prices to rise as much as 50 percent. The farming sector didn't reap the full benefit, managing just a 20 percent price hike. The real impact was in coal, with prices jumping two and a half times through 2008. And sales held up. So if ever there was any doubt what cushioned the impact of the GFC in Australia, there's your answer.

Too Strong For Our Own Good The ability to sell at a high local price was a godsend during the downturn. We don't have that advantage now. We're competing in an international market so our room to move on prices is determined by what our competitors are charging --- when our dollar is low we reap the rewards but when it's high, like now, we have to lower our prices locally. The graph shows how staggering the difference in export prices can be. The last few months have seen coal prices plummeting. If the dollar remains high we might need to increase prices of all our mineral exports to maintain margins, something which China and Japan might accommodate in the short term, but a sustained increase would soon see their allegiances shift.

Cheaper consumer goods is a short-term benefit of a stronger dollar, although the graph shows how the exchange rate has a far lesser impact on the price of imports than it does on exports. Look at the price of petrol --- it rose 23 percent over the last year (that's import prices, not what we pay at the bowser). Imagine how much higher it would be if the dollar had stayed where it was. Even the demand for imported Plasma TVs at knock-down prices is unsustainable if our inability to sell as much overseas results in job losses.

Yet the Aussie dollar is likely to stay strong for some time. With the Euro suffering the consequences of the Greek debt-disaster we're one of the few safe harbours for cash right now. Hopefully a strengthening Yuan and the US dollar might even things out with some of our trading partners, but we'll be expensive for Europeans for some time I think. Of course, as long as grandchildren exist, there will always be a big slice of the tourism market that will keep coming regardless.

See the ABS data here:
6457.0 - International Trade Price Indexes, Australia, Mar 2010