NZ v Australia: Who’s got the economic edge?
Jumping the ditch in search of a better life in Australia is a common tactic for many New Zealanders.
But how much better is it really? BNZ chief economist Mike Jones crunched the numbers.
HOUSING
Jones said New Zealand and Australian housing markets tended to move in sync, although there could be more of a “boom and bust” for prices in New Zealand. That has been seen in recent years. Australia didn’t have the same ramp up in house prices that New Zealand experienced in 2021 but also didn’t have the same price drop on the other side.
Australian prices are now rising more quickly than New Zealand’s, “indeed, Australian house prices recently reclaimed the 2022 record highs. By contrast, NZ prices remain about 14% below the (2021) record. They’re also unlikely to get back up there any time soon on our reckoning”.
Jones said both Australia and New Zealand would have house price growth of about 5% this year.
INTEREST RATES
The Reserve Bank of New Zealand has lifted the official cash rate by more than the Australian central bank but because more Australian borrowers are on floating mortgages, the average rate being paid on home loans is about the same.
The outlook for both inflation and interest rates were similar, he said.
LABOUR MARKET
Jones said conditions were deteriorating in both employment markets: “Both have experienced a large migration-inspired increase in labour supply. And neither economy is generating enough jobs for all these extra workers. Thus, unemployment rates have started to rise.”
However, he said the New Zealand labour market was cooling faster. Most migrants to New Zealand were on work visas while Australia’s boom was mainly students.
“We expect a larger increase in unemployment in New Zealand (to 5.5% this year from 4%) than Australia (to 4.5% from 3.7%). “This is likely to bring about bigger declines in labour turnover, job security, and wage growth on this side of the ditch,” he said. New Zealand’s labour market under-performance was one of the big differences between the two countries, he said. “It will make its presence felt in relative trends in house and rental prices, retail spending, and, potentially, inflation and interest rates ... the pull from additional job opportunities across the Tasman is likely to underscore further NZ-AU migration outflows this year.”
TRADE
Jones said prices for Australian key exports, such as iron ore, coal and LNG, held up better than New Zealand equivalents of meat, forestry and dairy in recent years.
“A strong Aussie export performance, New Zealand’s greater inclination to binge on imports through 2021/22 (itself reflecting an overheated economy), and the fact that NZ felt the Covid-era loss of international tourism more acutely have all contributed to a stark divergence in our trade and current account balances over recent years.
“New Zealand’s current deficit has at least stopped getting worse but remains at an eyebrow raising 6.9% of GDP. Australia is running a rare (until recently) current account surplus of just over 1% of GDP. It’s a bracing departure from the similar balance of payments trends prior to 2019.”
OVERALL
New Zealand is in recession, with GDP down in four of the past five quarters.
“If New Zealand’s economy hit a wall in late 2022, in Australia it’s been more of a cushion. Annual economic growth there has cooled to +1.5%, or -1% in per-capita terms. In both countries, the residential construction, manufacturing, and retail sectors stand out as weak spots.
“Our forecasts have both economies rounding the bottom of the business cycle around the middle of this year, albeit with New Zealand stooping to a lower bottom. Prospects for some interest rate and inflation relief over the second half will be key in shaping the upturns in both countries.”
Jones said he thought New Zealand could narrow the economic gap with Australia “but we’ve certainly got our work cut out”.
“We’re starting from a weaker position and NZ’s wider deficits will constrain our growth potential to some extent.”