A weaker dollar helps services exports
17 Jun 2016
- Australian Economy
- International Trade
- Visitor Economy
Expenditure on Australia’s second largest export earner, the Visitor Economy, is typically considered a discretionary item affected by economic conditions, industry supply, social and political events, and consumer sentiment. Currently, a range of operating factors are largely favourable, notably the value of the Australian dollar.
In 2015, total exports fell 3.2 per cent to $317 billion. This was due to goods exports falling 6.1 per cent. On the other hand, services exports rose ten per cent led by education and other personal travel, up 10.4 per cent and 12.4 per cent, respectively. We noted in our Visitor Economy paper that services will play an even greater role in the growth of Australian exports in coming years and the influence of a depreciating dollar is already having a positive impact on this trend as shown by double-digit growth in Visitor Economy-related exports.
As identified in our Dollar depreciation and export performance post, the commodity super cycle led to Australia experiencing one of the larger real exchange rate (REER) appreciations seen across the world economy, increasing by more than 50 per cent between January 2002 and December 2012. Since then, Australia’s REER has fallen by 16.6 per cent and therefore improving the competiveness of Australian exports.12
The level of the Australian dollar influences Visitor Economy demand both in terms of arrivals (short- and long-term visitors) and related exports. While income is often a primary determinant of visitors’ consumption, the price of services in one destination relative to another is highly influential in determining the appeal of a particular destination to the traveller3. Notably, the decline in the Australian dollar is also having a parallel impact on travel outflows and hence on the net balance as demonstrated by resident departures growth in 2015 (of 3.8 per cent) almost four percentage points lower than the long run average of 7.3 per cent4.
While this can be measured in a range of ways, a simple yet effective way to assess the relationship that exists between the Australian dollar and Visitor Economy-related exports, namely ‘education’ exports and ‘other’ personal exports, is through the coefficient of determination (or R2).
The coefficient of determination provides an indication of the variance that exists between a variable of interest, in this case exports, which may be explained by an influential factor, the Australian dollar. While this analysis excludes other important factors, it provides us with an insight into the trade exposure that exists due to year-to-year currency fluctuations.
Overall, the variance explained by changes in the exchange rate for both education-related exports and other personal exports were relatively even at 0.51 and 0.48, respectively. For the $18.8 billion education related travel sector, Thailand demonstrated the strongest relationship (at 0.69) while demand from the United States was clearly responsive to changes in the Australian dollar (at 0.82) for the $15.9 billion other personal travel exports sector5.
However, along with other influential factors, the R2 should be considered in the context of market value. For example, while the United States provided an indication of strong sensitivity, almost twice that of China’s (0.82 compared to 0.44), its contribution to other personal-related travel is 40 per cent of China’s ($1.2 billion compared to $3.0 billion).
1 Real effective exchange rate are adjusted weighted averages of bilateral exchange rates.
2 Derived by Austrade using BIS data (http://www.bis.org/statistics/eer.htm)
3 Austrade acknowledges that other factors such as income, quality, distance, seasonality, and security are also highly influential. However, holding these factors constant, if both destination were relatively the same given all factors except price it is likely that the less expensive destination would be chosen.
4 Source: ABS Overseas Arrivals and Departures, Australia (ABS Cat No 3401.0)
5 As discussed previously, other factors should also be considered. The bilateral AUD/USD has experienced strong appreciation and depreciation over the estimation period. The Mining Boom and the global financial crisis will likely have a strong influence over this result.