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Why the Depreciating AUD is good for the economy

We need to accept that Australia is now an energy economy and our relative standard of living is all about commodity prices. Therefore we should expect at least 2 years of adjustment to this new reality.

The good news is that any further depreciation of the currency is good for investment and we can expect an exchange rate of 70 cents (USD) to be the optimum level for the Australian economy. This is good for investment as asset prices and labour costs, previously expensive, will be more competitive globally. The Australian economy has come off a massive level of investment into the WA mining industry where $30b was invested in 2014. This equated to a high of $100k per capita income in WA which was way ahead of any other state.

By comparison, forecast CAPEX in 2016 is only $10b which represents a $20b hole - so where will the growth come from?

The slack will not be filled by commercial construction which is in a severe downturn with record vacancy rates partially due to the mining downturn. However, if you hadn't noticed, housing construction is booming at a rate of 150,000 new dwellings per year. This demand-driven housing construction will take up some of the slack from the downturn in mining and commercial construction. This is where growth will come from as we need to build 180,000 dwellings per year (up from the current rate of 150,000) to meet the housing shortfall of 300,000 dwellings across Australia. The sooner we adjust to the lower AUD and the benefits from lower labour costs and asset prices, the sooner investment across all sectors will recover to drive the Australian economy.

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