The falling dollar could be what helps Australia avoid its first recession in 24 years.
Australia went dangerously close to its first period of negative economic growth in more than four years during the three months to June with the Australian Bureau of Statistics revealing the economy grew by just 0.2 per cent during the period. That's down from 0.9 per cent growth in the previous three months while the result took its annual growth rate to just 2 per cent.
Investors have once again turned to the Reserve Bank of Australia to provide additional support after it elected to leave interest rates unchanged at 2 per cent on Tuesday. Indeed, the central bank has remained hesitant to lower interest rates any further after already cutting them twice this year, but will have to take the latest growth figures into consideration when it meets again next month.
However, further interest rate cuts mightn't be necessary after all.
Instead, the RBA could rely on a weaker Australian dollar to help bolster our economy.
The Australian dollar has fallen 24% over the last 12 months and dropped below US 70 cents for the first time in more than six years yesterday. It has since regained some ground to trade at US 70.25 cents, but analysts believe it won't be long before the currency is worth just US 60 cents (some are suggesting a fall into the US 50s is also on the cards).
A weaker currency is important to Australia as it makes our products more competitive against a basket of other nations. In other words, as our dollar falls, it becomes cheaper for foreign countries to buy our goods, thus boosting our exports and helping to support economic growth.
Notably, this will also play in the favour of mining companies such as BHP Billiton Limited (ASX: BHP), Rio Tinto Limited (ASX: RIO) and Fortescue Metals Group Limited (ASX: FMG), by helping to offset some of the impact of crashing commodity prices.
At the same time, a weaker dollar will make imports more expensive – thus bolstering demand for locally produced goods – whilst also attracting foreign tourists for cheaper holiday getaways.
Although the Reserve Bank may still see further interest rate cuts as necessary, it's by no means all 'doom and gloom' for the Australian economy, even despite the headwinds facing the country.