Sunday, September 27, 2015

Brian Gaynor: NZ strength slows the Tasman drift


The performance of the Australian and New Zealand economies has an important impact on a number of areas, particularly the labour sector and our red hot housing market.

There is usually a large net migration flow from New Zealand to Australia when the Australian economy outperforms us. This normally reduces the demand for New Zealand residential property.

When the New Zealand economy outperforms Australia, the net migration outflow slows dramatically and has a positive impact on NZ housing demand.

What do the recently released June Gross Domestic Product (GDP) figures tell us about the relative performance of the Australasian economies?

Australia’s June quarter GDP figures showed that the economy grew by 0.2 per cent compared with the March quarter and by 2 per cent compared with the June 2014 quarter (see table).

The low level of growth is indicative of an economy struggling under the weight of depressed commodity prices, particularly iron ore and coal prices.

Employment levels have increased but income growth has been fairly flat year on year. This has had a subdued impact on consumer spending.

Australia has had 13 consecutive quarters with economic growth below 1 per cent – a disappointing performance for an economy that has derived huge benefits from China’s rapid economic growth since the early 1990s.


New Zealand’s June quarter GDP figures, which were released on Thursday, showed the economy grew by 0.4 per cent compared with the previous quarter and by 2.4 per cent compared with the three months ended June 2014.

The quarter-on-quarter figures, which were below market expectations of 0.6 per cent, reflect a general economic activity slowdown. However, there were pockets of strength, particularly in residential property and the business services sector.

The Reserve Bank of New Zealand’s (RBNZ) latest economic forecasts released on September 10 show that the central bank is forecasting GDP growth between 0.5 per cent and 0.7 per cent, on a quarter-to-quarter basis, through to the end of 2016. This represents an annual growth rate of around 2 to 2.5 per cent.

The RBNZ had a number of observations about the domestic economy, including:
  • “Lower projected export receipts are a key reason for the softer outlook for domestic demand. Soft rural spending and cuts to on-farm investment contribute to business investment falling.”
  • “Weaker demand throughout the rest of the economy, as well as increased import costs from the lower exchange rate, are also weighing on the investment outlook.”
  • “Households in the wider economy are generally expected to maintain their level of spending.”
  • “Low interest rates, the strong net inflow of migrants and related strength in the housing market, and low world oil prices are expected to support consumption.”
  • “Overall, annual consumption growth is forecast to slow to around 2 per cent” but “one of the risks to this projection is that households pull back their consumption more”.
The RBNZ is forecasting slower economic growth but it is still expected to remain in excess of 2 per cent on a year-on-year basis. The bank believes the growth rate could be stronger than 2 per cent if export prices pick up but will fall below 2 per cent if personal consumption wanes.

The Reserve Bank of Australia (RBA) is forecasting an increase in the country’s growth rate from 2 per cent per annum at present to the 2 to 3 per cent range over the next 18 months. This is slightly higher than the RBNZ’s forecasts but the two predictions are within the margin of error.

The RBA’s forecasts are based on a number of assumptions including:
  • “Large falls in mining investments, which are offset by continued growth in resource exports.”
  • “Consumption growth is expected to rise and dwelling investment is forecast to remain strong.”
  • “This increase in household demand, as well as the response of net exports to the exchange rate depreciation, is expected to support a pick-up in non-mining business investment from 2016/17.”
But the RBA’s most interesting comment – as far as New Zealand is concerned – is that “the lower level of net immigration will persist for the next two years, in part because labour market conditions in Australia are expected to remain weaker than those in countries that have traditionally been a source of skilled, prime-age immigrants, such as New Zealand”.

In other words, the Australian central bank believes employment conditions will remain more attractive in NZ and encourage New Zealanders to stay at home.

This situation is reflected in a number of statistics showing that New Zealand has achieved job growth of 3 per cent over the past 12 months compared with 1.1 per cent in Australia. NZ’s average weekly earnings have grown by 3.2 per cent, in contrast to 2 per cent across the Tasman, and our unemployment rate is 5.9 per cent compared with 6.2 per cent in Australia.

The figures are even more impressive, from a New Zealand perspective, over the past three years:

The New Zealand economy has expanded by 8.1 per cent since mid-2012 compared with Australia’s 7 per cent growth rate.

New Zealand has created 7.3 per cent more jobs over this 36-month period compared with a 3.9 per cent jobs growth rate across the Tasman.

New Zealand wages and salaries have increased by 8.3 per cent compared with 9.9 per cent in Australia but the latter’s growth rate has slowed recently.

The superior performance of the New Zealand labour market has had a huge influence on migration trends, with New Zealand experiencing a net migration outflow to Australia of only 843 in the past 12 months, compared with 39,849 three years ago.

The overall impact of this is New Zealand now has a total annual net migration inflow of 59,639 from all countries, compared with an outflow of 3799 three years ago.

Last, but not least, is the impact that these economic figures have had on our housing market.

New Zealand housing prices have risen 10.7 per cent over the past 12 months, according to the Real Estate Institute of New Zealand, compared with 6.9 per cent in Australia.

Over the past three years, house prices have risen by 25.7 per cent and 22.1 per cent in New Zealand and Australia respectively.

But the real standout has been Auckland, where the median price has soared 46.4 per cent over the past three years. By comparison, Sydney house prices increased by 37.2 per cent over the same 36-month period, Melbourne 16.6 per cent, Brisbane 12.7 per cent and Perth 13.8 per cent.

There is an argument that New Zealand, particularly Auckland, is doing too well at present, particularly compared with most Australian cities.

This places the RBNZ in a difficult position. The country’s 0.4 per cent inflation rate suggests there there is further scope for it to cut its OCR (official cash rate) below 2.75 per cent. However, buoyant Auckland house prices make this a relatively high-risk decision.

It’s strange to say, but we almost need more Australian economic and job growth to encourage New Zealanders to move across the Tasman and take some of the pressure off the red hot Auckland residential property market.

Brian Gaynor is an investment analyst and the Executive Director of Milford Asset Management. 

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