Fresh from defeating Australia in the Cricket World Cup, New Zealand may soon celebrate another symbolic victory over its larger neighbour as its currency tests parity with the Australian dollar on the back of strong growth, a surge in immigration and sound political management. A decision on Thursday by the Reserve Bank of New Zealand to leave interest rates on hold at 3.5 per cent — 1.25 percentage points above Australian rates — and signal a prolonged period of rate stability pushed the Kiwi up 0.27 per cent to A$0.963 — close to a record high achieved last month. The RBNZ statement pointed to strong employment growth, construction activity and net immigration, underlining how the New Zealand economy is outperforming its larger neighbour. Last year gross domestic product grew by 3 per cent in New Zealand, compared with 2.5 per cent in Australia. The unemployment rates are 5.7 per cent and 6.3 per cent respectively.
Economists say New Zealand’s dependence on soft commodities, mainly dairy, rather than hard commodities such as iron ore, has insulated it more than Australia from China’s slowing growth. Stable politics, strong economic management and business confidence are also helping Wellington outperform its Antipodean rival. “Australia outperformed New Zealand in the first part of the commodities boom when iron ore and hard commodities outperformed dairy,” says Ivan Colhoun, chief markets economist at National Australia Bank. “But we have seen a turnround in the past few years as iron ore prices have fallen faster than dairy prices and migration flows have boosted the New Zealand economy.”
The devastating 2011 earthquake in Christchurch initially hit the New Zealand economy hard. But the rebuild is boosting the construction sector and the overall economy, with ANZ Bank forecasting that the earthquake-related stimulus will peak in 2017 at just under 2 per cent of GDP. A key indicator of the boom in New Zealand is the growing number of people moving to the country to work. In the year to the end of January, net immigration doubled to a record 53,800 people while the net outflow of New Zealand residents moving to Australia fell from 17,100 to 2,888 — the lowest level since 1992.
“Over the past 20 years talented New Zealanders flocked to Australia in search of better-paying jobs. This is flipping around as its economy has been doing better than Australia’s over the past one to two years,” says Saul Eslake at Bank of America Merrill Lynch. New Zealand’s economy is benefiting from a stable government led by Prime Minister John Key, who has managed to pass reforms, including sales tax rises and income tax cuts, while maintaining public support and business confidence. By contrast, Australian business confidence is stuck at its lowest level since the government of Prime Minister Tony Abbott was elected in September 2013.
“The Reserve Bank of Australia believes this is one of the reasons inhibiting the effectiveness of its monetary policy stimulus,” says Mr Eslake. The bank slashed interest rates to another record low of 2.25 per cent in February. Capital spending by Australian companies fell 2.2 per cent in the quarter to the end of December, missing economists’ forecasts of a 1.6 per cent fall. The divergence between Australia and New Zealand on interest rates and growth is pushing the Australian dollar to record lows against the Kiwi. In a report last month ANZ Bank said “champagne corks were popping for a parity party” and it “no longer discounted the possibility”.
However, ANZ concluded that parity for the Kiwi would only be temporary as the divergence in growth was not likely to be a permanent change and the two economies were inextricably linked, with Australia buying 20 per cent of New Zealand’s exports. “A sustained downturn in Australia would have consequences for growth in New Zealand,” says Daniel Been, ANZ currency strategist. In the meantime, New Zealanders may take some pleasure in urging their Australian neighbours to get their economic house in order.