From the Chief Economist David Woods
The global economy and the strong US dollar The global economic outlook has deteriorated sharply. Growth is slowing as economies lose momentum – Treasury forecasts global growth at just 2.8 per cent next year, compared to 6 per cent in 2021. Inflation remains
rise – a double whammy which can lead to severe budget pressure and badly crimp growth. Fortunately, most economies in our region currently appear relatively stable, with Southeast and South Asian growth forecast to outpace the global average next year. Australia’s economy has so far proven resilient, but there is significant uncertainty ahead. As stated in the Budget on 25 October, Australia’s economic growth will slow given the substantial global economic downturn, rising interest rates and falling real wages. The high US dollar (and lower Australian dollar) makes our exports more competitive and makes assets priced in Australian dollars comparatively attractive for investors. Our exports hit a record high value of $596 billion in 2021-22 – 30 per cent higher than the previous year. But as the global economy loses momentum and global financial conditions tighten, we can expect weaker demand for Australian exports and reduced foreign investment.
stubbornly high, particularly in advanced economies, prompting a rapid synchronised tightening of monetary policy by central banks. Few banks are moving as aggressively as the US Federal Reserve, which has raised its target rate by a cumulative 3.75 per cent since March 2022. The US Federal Reserve is focused on US inflation, but its actions affect global markets. The relative safety of US assets makes them highly attractive to investors in times of uncertainty, particularly when coupled with the rapidly rising interest rates on offer. The resulting demand has sent the value of the US dollar soaring, with the dollar index (DXY) hitting a 20 year high in late September. The high US dollar affects every country. Developing countries can be at risk from the rising dollar as their debts are often denominated in US dollars. Debt payments become costlier as their currency weakens just as interest rates
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business envoy
Department of Foreign Affairs and Trade
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