NZ's economic bragging rights

23:10, Jan 23 2014

When Joe Hockey used to hold up New Zealand as some sort of economic benchmark, it would leave a few people scratching their heads.

At the time, economic data clearly showed Australia outperforming its trans-Tasman neighbour, as well as many of its other peers.

Growth was strong, and we'd repeatedly been told that the budget was on course for a quick surplus and debt was under control.

We enjoyed a triple-A credit rating from all three major global agencies, something the Kiwis don't.

Was Hockey, the then-shadow treasurer, just winding up former Labor treasurer Wayne Swan, or was it some sort of great economic foresight?

One parliamentary exchange between the pair happened just days after Swan had delivered what was to be his last budget in May 2013.


Swan had been forced to push back the timing of a much promised 2012/13 balanced budget to 2015/16 because of declining revenues and a high dollar.

In contrast, Swan's New Zealand counterpart Bill English had just announced a return to a surplus a year earlier than Australia.

Hockey used question time to highlight the point.

"How can the Australian Treasurer insist that the government's budget of deficits, higher unemployment and slower economic growth is unavoidable when New Zealand has been able to deliver an earlier surplus without a major resources industry and a strong New Zealand dollar?" he said.

Swan was "completely dumbfounded" by the comparison.

"There are just a couple of small differences between Australia and New Zealand. New Zealand went into recession," Swan replied.

Australia was one of the very few countries to avoid a recession in the wake of the 2008-2009 global financial crisis - in fact the economy hasn't suffered one for 22 years.

But times have changed.

While Australia isn't about to head down the recession gurgler, economic growth is expected to struggle below trend of 3.25 per cent both this year and next.

The transition away from a dying mining investment boom to broader based growth is taking much longer than first hoped, and the once breathtaking terms of trade are in decline.

Hockey's first mid-year budget review as Treasurer, released just before Christmas, warned that the budget could remain in deficit for the next decade and that debt could rise to two-thirds of a trillion dollars unless the government takes drastic action.

Unemployment is expected to grow to six per cent by mid-2014, and accelerate further over the next two years.
It was 5.8 per cent in December.

This, of course, is all Labor's fault, Hockey insists.

In contrast, English also released his budget update in December, sticking to his forecast of a balanced budget in 2015, rising to $5.6 billion in 2018.

The Organisation for Economic Co-operation and Development (OECD) expects NZ to grow by 3.3 per cent in 2014, one of the strongest among its developed countries, while English is forecasting a 3.6 per cent peak in March 2015.

Unemployment is expected to ease from 6.2 per cent in 2013 to 5.8 per cent in 2014 and to 4.7 per cent by 2018.

The rebuilding in the Canterbury region of NZ's South Island after the 2010 and 2011 earthquakes is a key factor supporting growth.

New Zealand is also benefiting from the next stage of Asia's evolution and a growing middle class with strong demand for its commodity exports, particularly dairy, which has pushed the country's terms of trade to near record highs.

But while the economic bragging rights have shifted across the Tasman, it comes at a cost.

The Reserve Bank of New Zealand (RBNZ) could lift its key interest rate as early as next week, particularly after this week's data showed its inflation rate accelerating at a faster pace than the central bank had anticipated.

Barclays economist for Australia and New Zealand Kieran Davies agrees that an RBNZ rate rise on January 30 is a risk but he expects the move will more likely be in March.

With evidence of strong activity and faster underlying inflation he says "it is hard for the RBNZ to justify keeping rates at an earthquake emergency low of 2.5 per cent".

In contrast, there is little chance of the Reserve Bank of Australia (RBA) following suit anytime soon.

While this week's Australian inflation data for the final three months of 2013 was around double what economists had been expecting, tepid economic growth and rising unemployment presents a challenge for the RBA.

Economists at ANZ believe that while the inflation numbers will make the RBA uncomfortable, a rate hike here is probably a year away.

Such interest-rate dynamics could see the kiwi dollar push towards parity against the Aussie dollar, or at least test the record low just under $1.03 that was set in 1997.

The exchange rate dipped below A$1.06 ($1.13) this week.

It was trading around A$1.25 a year ago.