Thanks to the release of better-than-expected economic data, Australia’s economy is on a ‘road to recovery’ according to Reserve Bank of Australia (RBA) Governor Philip Lowe. The news is great for the economy as a whole and it’s even better when we consider that the RBA has also upgraded its forecasts for near-term economic activity. The bank now forecasts growth of 5% in 2021 and 4% the year after.
With this great economic data in mind, we’ll take a look at the factors that are currently driving the positive outlook for the Australian economy and assess how they are impacting the Australian dollar. We’ll then take a look at a longer-term view and analyze whether climate change could be the biggest factor influencing the economy in the years to come.
Factors Impacting the Performance of the Australian Dollar
The main factor that drives the value of the Australian dollar is the interest rate differential. This is the benefit an investor receives for investing in Australian assets rather than those of another country. As of November 2020, Australia’s interest rate stands at a record low of 0.10%. As the interest rate is lower in Australia than it is in other countries, investing in Australian assets is currently incredibly attractive for foreign investors, and this is forcing the value of the Australian dollar higher. In addition to this, the government’s credit rating also has an impact on the value of the dollar. Currently, Australia is maintaining its AAA rating, which is the best available. This means the Australian government can pay less interest on its debt payments, again making the dollar more attractive and forcing its price higher.
Although domestic factors are important for influencing the price of the dollar, international and overseas factors are also important. This is because the Australian dollar is seen as a ‘commodity currency’, with iron ore particularly underpinning the strength of the Australian dollar. Over the course of this year, the value of iron ore has risen sharply, and this has once more strengthened the value of the dollar against a basket of currencies.
All of these factors have driven the price of the dollar higher this year, which is great news for the Australian economy as a whole. However, it has also been good news for Australian citizens who trade forex, as they have been able to profit from the price movements caused by the above factors. However, if you’re clued up on the factors driving currency valuations and you’re considering trading, it’s vital that you research forex broker reviews before you begin. This is because some brokers are better-equipped to help you capitalize on price movements than others. By doing your research before you begin trading, you can learn more about each broker’s execution speeds, how reliable the broker’s trading platform is, and how safe your funds are before you invest.
The Potential Impact of Climate Change on the Future of the Australian Economy
Although the current outlook for the Australian economy is bullish, some analysts remain wary for the country’s long-term economic outlook due to the looming threat of climate change, which is already having a devastating effect here in Australia.
According to a recent survey, if climate change continues to progress unchecked for the next 50 years, it could mean that Australia will lose $4.3tn in economic opportunities. During the same period, the Australian economy would be 6% smaller, and there would be 880,000 fewer jobs.
However, many people consider the above to be a worst-case scenario. This is because, if Australia maintains its commitment to net zero emissions by 2050 and works with other nations to keep global warming to 1.5C during that time, then it’s thought that the economy could instead expand by 2.6%. This would add $680bn in value to the economy and would create 250,000 jobs in the process.
Conclusion: Will the ‘Road to Recovery’ be Smooth for the Australian Economy?
Although the Australian economy appears to be on a stable footing thanks to the country’s low interest rates, and the rising price of iron ore exports, the battle against climate change could derail this progress and potentially set the economy back into recession.
As a result, it’s clear that climate change is the biggest problem facing the Australian economy, and successive governments will need to work hard to ensure that Australia meets its climate change targets by investing in high-growth industries, supporting innovation in advanced manufacturing, and investing in infrastructure upgrades. If they’re able to do so, Australia’s ‘road to recovery’ could be incredibly smooth, and we can expect to see economic expansion of up to 3% or $700bn in the next 50 years.
