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INTERVIEWS
WITH ECONOMISTS
PETER
HORN
Peter Horn has been a professional economist since 1981
and has a wealth of experience in modelling, forecasting, policy
advice and financial markets. He has a first-class honours degree
from Queensland University and a Masters degree from the ANU.
For the first 14 years of his career, Peter was an economist at
the Treasury, Canberra. In various positions there Peter:
- prepared
quarterly forecasts of the Australian economy for the Government
- redesigned
the Treasury macro-econometric model of the Australian economy
- provided
Ministers with advice as to the implications of economic releases
and prepared speeches for Ministers
- provided
policy advice to Ministers to set the overall fiscal stance,
provided advice to Ministers on Government spending proposals,
was responsible for coordinating the budget processes and writing
Budget papers
- was Treasury's
sole representative in New York from 1991–1993 and was
responsible for Treasury's forecasts of the US and Canadian
economies and financial markets as well as providing US investors,
rating agencies and financial markets with the Government's
views on the Australian economy
- was in
charge of the International Branch, which prepared Treasury
forecasts of the global economy and provided policy advice on
the implications for the Australian economy.
In recent
years Peter has been the Chief Economist at several broking firms
and joined CSFB Australia as Chief Economist in July 1998. Peter
is responsible for preparing forecasts of the Australian economy
and financial markets and disseminating Australian and global
research to Australian and overseas clients.
In your opinion, what are the factors that determine the movements
of the Australian dollar? Do these factors explain the plunge
to around US$0.55 in the late 1990s?
Historically, the factors that have determined the Australian
dollar have been actual and expected commodity prices and interest
differentials. Together these two influences explain around 80
per cent of movements in the Australian dollar post-float. Another
factor has been the current account deficit. This influence is
not symmetric, however, and tends to act only as a negative for
the Australian dollar when it reaches high levels (5–6 per
cent of GDP). Such high levels of the current account deficit
usually raise questions about the sustainability of the external
debt position and consequent potential downgrades to Australia’s
credit ratings. Political uncertainty, around elections or surrounding
the passage of key pieces of government legislation, can also
impact on the Australian dollar. The plunge in the Australian
dollar to US$0.55 was excessive based on actual movements in commodity
prices and interest differentials, but at that time there were
fears about a global recession, which meant that expectations
were for further sharp falls in commodity prices.
Do you believe in the purchasing power parity theory?
Yes, but as a long-run proposition. If the global economy were
in a steady state position, the Australian dollar would converge
on its PPP value. However, there are always demand and supply
side shocks affecting global activity, which means that PPP-based
estimates do not provide much help in short-term (1–2 years)
forecasting of the Australian dollar. Over the longer-term, we
do see cyclical swings of the Australian dollar around its PPP
value.
Is a significant
current account deficit and external debt indicative of a ‘banana
republic’ status? In other words, was Keating right when
he made his famous 1986 remark that Australia could become a ‘banana
republic’?
A large current account deficit accompanied by rising external
debt can lead to ‘banana republic’ status if it is a
result of internal imbalances in the country. In other words,
if domestic demand is growing too rapidly and is being financed
by external debt, problems are being stored up, especially if
the domestic demand is geared towards unprofitable private or
public sector investment or simply consumer spending. That was
the case in Australia in 1986 with, in particular, government
spending and borrowing being unsustainably high. On the other
hand, if a growing current account deficit is a result of an external
shock, such as that which Australia experienced in 1998 and 1999,
while there are few domestic imbalances, the phenomenon is temporary
and not a ‘banana republic’ case.
Some economists think that fixed exchange rates are evil. Why,
then, is Europe moving towards a monetary union?
Fixed exchange rates are not evil, but become impossible to defend
at levels that are not consistent with underlying fundamentals.
That was the reason the Australian dollar was floated in 1983
and why the Asian economies eventually had to break the link to
the US dollar in 1997. The move to the euro is largely based on
political, rather than economic motivations. While there are clear
benefits in terms of lower transaction costs, the difficulty that
the euro faces is that economic fundamentals are not the same
across all countries. The United States, for example, has common
laws, language and cultures and labour is very mobile across its
different states. That is clearly not the case for the euro, which
is being used in 11 economies, raising questions about its longer-term
sustainability.
In your opinion, is the Australian dollar part of the US dollar
bloc or the yen bloc?
Neither. We certainly should not belong to a yen bloc. Japan is
predominantly a commodity importer and manufactured goods exporter,
while Australia is predominantly a commodity exporter and manufactured
goods importer. That means that Australia’s terms of trade
are the exact opposite of Japan’s. For example, a fall in
global commodity prices should lead to a fall in the Australian
dollar (helping exporters in Australian dollar terms) and a rise
in the yen. Australia is often called part of the US dollar bloc
as well. Economic cycles (and hence interest differentials) tend
to be quite closely correlated between the United States and Australia,
so there is some logic to moving with the United States. However,
the United States is less reliant on commodity exports than is
Australia and we would still like to see the Australian dollar
depreciate against the US dollar at a time of declining commodity
prices. The bloc we tend to be grouped with contains other commodity-producing
economies, such as Canada and New Zealand. That sort of ‘non-US-dollar’
bloc seems to make more sense given that these economies are all
small, open, commodity-producing economies.
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