Saturday, March 26, 2016

Brian Gaynor: Turmoil at top keeping Oz in our shadow


The latest economic statistics, including the Gross Domestic Product (GDP) figures released this week, continue to show the New Zealand economy is outperforming Australia.

This largely explains why New Zealand is experiencing a strong net migration inflow and a buoyant residential property market.

Our dairy industry is in a deep slump but it has not yet had an impact on the rest of the economy and there are few dark clouds, either overhead or on the horizon.

The New Zealand economy grew by 0.9 per cent in the December 2015 quarter compared with the September quarter while the Australian economy expanded by 0.6 per cent over the same period.

New Zealand’s 0.9 per cent growth rate was ahead of market expectations and the Reserve Bank of New Zealand (RBNZ) forecast of 0.7 per cent. It followed 0.3 per cent growth in the March 2015 quarter, 0.3 per cent in the June quarter and 0.9 per cent in the September quarter.

The domestic economy has grown for 11 consecutive quarters. This is the longest sustained period of economic growth in New Zealand since the period between the June 1998 and September 2005 quarters when the economy recorded 30 consecutive quarters of economic growth.

The main movements by industry in the December 2015 quarter were:
  • Construction activity increased by 2.5 per cent compared with the September quarter.
  • Retail trade and accommodation was up 1.7 per cent. This was due to increased activity in accommodation, furniture, electrical and hardware retailing, and food and beverage services.
  • Business services expanded by 1.5 per cent due to growth in advertising, market research and management services.
  • Agriculture was down 1.7 per cent because of the decrease in sheep and beef production.
The December 2015 quarter GDP figures show that the New Zealand economy ended the year on a strong note but the dairy sector downturn is expected to have some impact in the quarters ahead.

Nevertheless, the Reserve Bank is forecasting positive economic growth for every quarter in 2016, 2017 and 2018 with the March 2016 quarter projected to grow by 0.7 per cent, the next two quarters by 0.8 per cent each and the December 2016 quarter by 0.7 per cent.

The other important economic statistic this week was the country’s balance of payments or current account, which measures all of New Zealand’s international receipts and payments.

New Zealand has traditionally had a current account deficit but the good news is that the annual deficit has fallen from nearly $15 billion in 2008 to under $7 billion in the latest calendar year. Any current account deficit in excess of 5 per cent of GDP is considered to be a problem and the country’s current account to GDP ratio was nearly 8 per cent in 2008.

NZ versus Australia

The ratio dropped to a recent low of 2.4 per cent in mid-2014 but has increased to 3.1 per cent since then. This 3.1 per cent deficit is not a concern, particularly as it compares with Australia’s current account deficit to GDP ratio of 4.6 per cent.

But one of the most significant Australasian developments in the past 12 months has been New Zealand’s population growth of 2.1 per cent compared with 1.4 per cent in Australia. This is a reversal of previous trends.

In the early 2000s New Zealand’s population struggled to grow by more than 1 per cent per annum while Australia’s population regularly grew by more than 1.5 per cent.

One of the main reasons for this was the large number of New Zealanders who crossed the Tasman looking for higher-paid work.

For example, in 2007 and 2008 a total of 82,556 New Zealand citizens migrated to Australia and only 16,695 came back, resulting in a net loss of 63,861 for the two-year period.

In the past 24 months only 44,725 New Zealanders moved across the Tasman while 32,970 have returned, for a net loss of only 12,655 domestic citizens to Australia.

The simple reason for this is that since the end of 2012 the New Zealand economy has created 10.1 per cent more jobs whereas the Australian economy has created only 4.2 per cent more employment. In addition, New Zealand has an unemployment rate of only 5.3 per cent at present compared with 5.8 per cent in Australia.

The RBNZ is projecting that the country’s unemployment rate will fall to 4.9 per cent by 2018.

In light of the strong domestic economy, and optimistic outlook, the RBNZ has been criticised for cutting its Official Cash Rate (OCR) from 2.50 per cent to 2.25 per cent this month.

Assistant RBNZ Governor and head of economics John McDermott defended the rate cut this week, commenting that: “Inflation expectations are a key issue for monetary policy at the moment. Inflation expectations have fallen significantly recently across a range of measures, and this is a concern for the Bank, contributing to the need for low interest rate settings.”

Our inflation rate is extremely low but these official inflation figures don’t take into account house price inflation. The Reserve Bank seems to be more concerned about low levels of consumer price inflation when an overheated housing market presents a much bigger threat to the economy.

Unsurprisingly, the New Zealand sharemarket has outperformed the ASX since the end of 2014. During this period the NZX 50 Gross Index has appreciated by 18.1 per cent while the S&P/ASX 200 Accumulation Index has risen by only 1.4 per cent.

This reflects the relative performance of the two economies and the mix of listed companies. The ASX has a large number of mining stocks and other companies exposed to the Chinese economy while the NZX is top-heavy in utilities and infrastructure companies. These have fairly steady earnings and high dividend yields.

But one of the biggest differences between New Zealand and Australia at present is political stability. New Zealand has had two Prime Ministers, Helen Clark and John Key, since 1999 while Australia has had six — John Howard, Kevin Rudd, Julia Gillard, Kevin Rudd for a second term, Tony Abbott and Malcolm Turnbull.

There has been more back stabbing and coups d’etat in Australia in recent years than one would expect in a central African country. In addition, Prime Minister Malcolm Turnbull is expected to call a general election within the next few months.

The Australian political establishment has been under further scrutiny in recent weeks following the release of The Road to Ruin: How Tony Abbott and Peta Credlin destroyed their own government. The book was written by Niki Savva, a political columnist at the Australian.

The book, which has received a huge amount of publicity across the Tasman, argues that Credlin, who was Abbott’s chief of staff, effectively controlled former Prime Minister Abbott and there are strong suggestions they had an affair.

Savva claims that the Abbott Administration was in total disarray and the former Prime Minister had little interest in economic issues. Savva’s analysis has not been widely challenged although she has been criticised for not interviewing either Abbott or Credlin before publication.

Australia is lagging behind New Zealand at present but it still has massive natural resources and has the potential to pick up quickly again, particularly when it has better political leadership and stability.


When this occurs the migration from New Zealand to Australia will resume and this will have implications for our housing market and the rest of the economy.

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

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