Weak currencies, strong exports

September 28, 2015 09:40 AM

A weaker currency gives a tangible boost to exports despite the rise of global supply chains blurring the country of origin of many products, according to research published by the International Monetary Fund on Monday.

Analysis by IMF economists found a 10% depreciation in a country's currency, adjusted for inflation, boosted net exports by an average 1.5% of economic output - mostly within the first year.

A separate chapter in the IMF's regular update on the world economy, which is expected to highlight a weaker outlook for global growth, also predicted more pain ahead for commodity exporters amid continued low prices for oil and other raw materials.

The findings on currencies suggest a hit to exports for the United States, after a real dollar appreciation against a range of trading partners worth more than 14% over the last year, and an export boost for countries with weakening currencies, like the euro area and Brazil.

Japan, which has seen the yen's real broad effective exchange rate fall nearly 9% in the last year, was an exception, given a rise in offshoring since the global financial crisis and a devastating earthquake in 2011.

Some economists argue that the overall impact of exchange rates on trade had been blunted by global supply chains, where inputs from many countries go into producing one final product.

But IMF staff found there was little evidence to suggest that the link between currencies and exports was broken.

Other research found continued low commodity prices, after a sharp drop in the value of goods ranging from metals to food since 2011, would cut 1 percentage point from commodity exporters' average growth rates in 2015-17 compared to 2012-14.

Countries exporting oil and other energy products would see a hit more than twice that size, the research found.

Lower commodity prices also dampened countries' economic potential and meant that trying to stimulate growth with low interest rates and more public spending would likely backfire, fanning inflation rather than boosting jobs and investment.

The research bolsters the IMF's call for countries to undertake deep structural reforms to boost economic output rather than relying on quick fixes, a message likely to be hammered home at IMF and World Bank meetings in Peru next week.

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Krista Hughes, Reuters