Productivity loss inevitable given higher dollar: Henry

The high Australian dollar is here to stay, and causing an unavoidable fall in national productivity, Ken Henry said in a speech to the Australian Business Congress today.

The former treasury boss, who is head of the government’s white paper into Australia’s place in the Asian century, said the Australian dollar was now 50% higher than its post-float average.

Demand for our natural resources is the main driver of the appreciation.

The rise in our currency, Henry said, was having an expected, but difficult effect on productivity, particularly in trade-exposed industries.

Importers, and those who compete with imports, have to lower their prices because of high dollar. This means every part of investment yields a lower return, crippling productivity.

Henry stressed that things like flexibility and investment in human capital are positive things for a business’ productivity.

“But let’s not kid ourselves,” he continued.

“Australia is experiencing the largest sustained external shock to ever hit the economy.” While the rise of Asia presented a once-on-a-lifetime opportunity for Australian businesses, taking advantage of this is likely to require some measure of structural change.

Henry also briefly touched on possible measures to lower the Australian dollar. Former RBA board member and ANU economist Warwick McKibbin recently called for the Reserve Bank to intervene in global currency markets to lower the value of our currency.

Henry outlined several methods that could be used to do this, but concluded that Australia floated its currency in 1983 “for good reason”.

He added that the scale of the interventions needed to lower the Australian dollar were too large to be desirable. “To what low level would the Australian government have to cut the cash rate to bring the Australian dollar down to a better level?”

“I haven’t seen the numbers put on these things, but I expect the numbers to be quite implausible.

“In the meantime, it would be prudent to assume that an elevated exchange rate will be with us for quite some time. It is sensible to think about how to adjust to that.”