Great question; one to which I think there is no definitive answer and can in fact be both the positive and the negative. I think if you asked 10 economists you would receive 10 different answers, but in 2 years ask a historian and they will tell you exactly what will happen!

Given the spiraling national debt we should consider the likely scenario of the Reserve Bank reducing interest rates further to increase inflation to reduce the value of the debt in a controlled and measured way. With such a large debt, it would seem unlikely that the ARB would seek to increase interest and slow growth or inflation and would particularly wish to avoid deflation.

If this does happen, businesses and consumers with large debts will benefit from the lower interest rates and the inflation (provided they keep their jobs and businesses afloat that is).

Many of our clients in a variety of sectors are looking forward to a growth in their income from 2% - 10% depending on their industry and location. Whether it be farmers due to the favorable crop conditions (again depending on location), manufacturers, importers and exporters alike. Some of the others that started in the past 2 years fear a drop in US Parity as it affects their buying power, but perhaps haven't considered sourcing other markets or comparing AUD to other currencies.

In short, the more optimistic the client, the more variable their business model tends to be. If you are able to adapt to the changing conditions, you would see the economy improving as markets open. If you have a rigid or fixed business model, you may see the changes to the economy as deteriorating conditions.

From client feedback, engineering looks to be very flat for 2014. There are some small projects still available but larger projects have been completed during the 2012-2013 years. Clients are looking to make the most of their current assets and minimize capital expenditure.I don't see things changing till late 2014. Most engineering companies have down sized during 2013 as booked work for 2014 has dried up, they are looking to reserve cash and retain key staff only.  However, I think 2015 will be a big year for early stage project development and planning, with capital expenditure to begin in 2016. I intend to spend most of 2014 developing business relationships.

This is a really good question Neil, I personally feel that the economy will improve slightly. It's been low for a while now so I feel that the trend will go upwards slowly. I personally though will be spending less next year :)

Love to hear other people's opinions too!

Hi Neil,

Great question. I think there is something peculiar going on with macro-economics and it will be interesting to see how it plays out. Right now, we have a situation where Australia's AAA 10 year bonds are yielding higher than countries which we all know are in trouble - Portugal, Spain, Ireland. The Eurobond market is operating in a perverse manner similar to GFC days. It will be interesting to see how this unfolds.

We also have the situation in the US where the stimulus program is being tapered which is going to cause a natural devaluation of the AUD. This will help our export businesses and pair back some of the current online imports which in theory should help our local manufacturers if there are any left as well as local travel industry as cheap European holidays become a thing of the past.

Our dollar will also devalue against the Chinese renminbi which means that our Chinese imports will be more expensive and potentially induce inflation on our ecomony. This will put pressure on the RBA to lift rates on the back half of next year which will of course have a dampening effect on the economy.

~~Good answer. I am far from convinced that a lower $AU will be beneficial. Yes in theory it is easier to obtain some export sales, however, currently mining, aviation and agribusiness have enjoyed the advantage of a high dollar by reducing fuel, industrial and agrochemical costs, veterinary medications and supplements, plus massive plant and equipment costs. Not only does the base cost of these items fall but the cost of shipping, freight etc.

In each of our intensive agribusiness investments; chemicals, mainly imported, are our second highest cost after labour, followed not far behind by fuel and freight. A tractor has a useful life (for us) of 4  years and (say) a slasher 2 so a low dollar pushes OPEX and CAPEX up.

Sure domestic travel may improve but fuel prices, aircraft and maintenance costs will rise therefore the days of ultra-cheap flights will be over. Sun hats, lotions, clothing and even the kids bucket and spade, all holiday essentials are probably manufactured off shore and thus even more inflationary pressure.

I am not an economist and there is much I cannot understand yet I question...."is a low dollar an outdated mantra?"

If the country was a business I would be concentrating on lifting revenues through core competencies, working to value add and lift unit returns, educating and motivating staff, improving cost and production efficiencies on a daily basis and investing the profits into building the future. The $ is very much like the interest rate for business, plan and work around it.

Exchange rate parity or comparison with the US is dated. The US  is a falling star. The US is where Britain was in 1918 and China sits where the US then sat. We need the next rising star as a partner. For how much longer will we buy and sell in US$? The world is no longer Eurocentric.

imagine the impact of a 2% interest rate increase, caused by inflation, over the next 2 to 3 years on young families who purchased houses at 5% interest and the flow on effect to property prices.

The 2.0m SME's in Australia are the silent majority. If they had access to funding, tax relief to adequately recompense risk, and better education the nation would move forward.