“Dutch disease” effects could be unwinding rapidly as dollar plummets

There are indications that the effect of “Dutch disease” in Australia is more pronounced than that in Canada.

Dutch disease – coined by The Economist in the 1970s to explain the Dutch manufacturing slump after a natural gas boom – describes the boom in a country’s raw materials at the expense of trade-exposed industries due to a stronger currency.

Bloomberg reports that both Australia and Canada have seen raw materials booms in the last decade, which are unwinding, and the Australian dollar is dropping faster than Canada’s.

The Aussie dollar closed at $US 82.93 cents in New York yesterday, and this represents a decline since June 30 that is nearly twice the rate of the Canadian dollar.

“If you’re looking for evidence of Dutch Disease, the shrinking of manufacturing and other sectors outside of energy and mining, Australia has suffered a lot more than Canada over the last 15 years,” Greg Moore, a senior currency strategist at RBC, told Bloomberg.

Whether Australia is or isn’t affected by Dutch disease has been debated in recent years, especially in terms of the local automotive sector’s collapse.

Dr Janine Dixon, a Senior Research Fellow at the Centre of Policy Studies at Victoria University, wrote last month in The Conversation that there could be positive news, especially in Victoria, for manufacturing.

“As the boom unwinds, the effects of Dutch Disease will also unwind,” wrote Dixon.

“A large fall in the Australian dollar will revive the competitiveness of manufacturing, more than compensating for the loss of the motor vehicle plants.”

Image: http://www.start-a-new-life-in-australia.com

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