NZ And Australian Economies Compared

NZ And Australian Economies Compared

RBNZ Governor Alan Bollard today addressed the Trans-Tasman Business Circle, discussing the similarities and differences between the New Zealand and Australian economies. The speech offered little new information for market pundits to chew on, but appeared to be an effort to influence financial market pricing by highlighting the key differences between New Zealand and its nearby counterpart.

In the speech delivered in Auckland, Dr. Bollard highlighted that New Zealand is “not Australia”, but could be its “lucky neighbour.” Indeed, the Antipodean economies have ventured on extremely divergent paths in recent quarters. Australia was one of the few developed nations to avoid back-to-back declines in GDP, whereas New Zealand endured five straight quarters of negative GDP growth, marking its longest recession on record. Bollard highlighted today that this makes the New Zealand economy “more vulnerable”. 

Adding to this, the Governor pointed out that New Zealand could improve its prospects by taking advantage of Australia’s very strong future growth potential, stemming from another minerals boom, solid investment, and a positive export outlook. Australia will likely be a very strong growth market, and could help New Zealand to “indirectly benefit from East Asian growth.” 

The problem, though, according to Bollard, is that “financial markets treat us [New Zealand] like Australia” and, by not “appreciating” the differences between the two economies, financial markets will risk “eventually losing money.” This is most evident in the relatively stable NZD/AUD cross-rate, according to Dr. Bollard. Indeed, the cross rate has averaged A$0.80 this year, deviating very little from that level, and running not far below its long-run average of A$0.85.

The strong NZ currency has for some time been a key source of concern for RBNZ officials, who believes that, in order to promote sustainable recovery, the drivers of economic growth in New Zealand need to shift away from consumers toward exports. Despite strong NZD, however, exports have held up quite well, growing 4.7%q/q in 2Q.

When looking at interest rate expectations, financial markets view the Australian and New Zealand countries similarly despite different growth and inflation forecasts. Market expectations forecast another 175bp of tightening from the RBA by the end of next year, and 150bp of tightening from the RBNZ.

In our view, though, the RBNZ’s tightening cycle will kick off nine months after that of the RBA. Our forecast remains that the next tightening cycle in New Zealand will start mid-next year, with the RBNZ delivering a 50bp hike in July. Our forecasts call for the RBNZ to hike the OCR 150bp in the final six months of 2010. Governor Bollard has pledged to keep the OCR “at” the current level until 2H10, seeing no “urgency” to withdraw the monetary policy stimulus.

We do, though, acknowledge the risk of an earlier RBNZ rate hike. A sustained string of firmer consumer-related data, particularly related to the housing market, could prompt the RBNZ to tighten policy earlier in 2010. In recent commentary, Governor Bollard has highlighted the increase in household spending and the pickup in the housing market, both of which could, if sustained, encourage another debt-fuelled household spending spree, which the RBNZ will be prepared to nip in the bud by hiking the OCR sooner rather than later.

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