Brian Fallow 's Opinion

The Economics Editor of the NZ Herald

Brian Fallow: Australian economy not that bad

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Business confidence across Tasman rises to a two-year high as focus turns to housing and non-mining sectors

Consensus forecasts for Australian growth this year are 2.4 per cent and for next year 2.6 per cent. Photo / Getty Images
Consensus forecasts for Australian growth this year are 2.4 per cent and for next year 2.6 per cent. Photo / Getty Images

A successful rebalancing of the Australian economy should be positive for New Zealand. Business confidence in Australia has jumped to a two-year high, from net negative levels, in the first survey since last weekend's election.

From this distance it would be foolish to be dogmatic about why.

Maybe it is the normal preference of business for a centre-right government.

Maybe it is relief at the end of an extended period of political uncertainty.

But maybe it is because Australian businesspeople have taken the opportunity to have a fresh look at the economy around them.

Because it isn't that bad.

"Australia's growth is a bit sluggish, but hardly disastrously slow" is how HSBC's chief economist for Australia and New Zealand, Paul Bloxham, puts it.

"While growth is slowing down, it is running at a pace we would characterise as a bit below trend."

For the year ended June it was 2.6 per cent, as it slowed from an annualised clip of 3 per cent in the second half of last year to 2.3 per cent in the first half of this year.

We don't get June GDP numbers from Statistics New Zealand until next week, but New Zealand's growth over the year ended March was 2.5 per cent.

Over the past six years Australia's GDP growth rate at 2.5 per cent per annum has been about twice New Zealand's. That period includes a severe global recession, of course, which Australia decided not to join in but we did.

Consensus forecasts for Australian growth this year are 2.4 per cent and for next year 2.6 per cent.

And for the three years from the middle of next year the Australian Treasury, in its pre-election update, forecasts growth of 3 per cent a year while its New Zealand counterpart sees about 2.5 per cent a year for us. Look beneath those headline numbers at the composition of growth and the story changes, however.

For some time Australians have talked about a two-speed economy, with a booming resources sector driven by Chinese demand while other sectors suffered from a high Aussie dollar and the impact of the Reserve Bank of Australia raising interest rates by 175 basis points between late 2009 and late 2010.

The unemployment rate has risen from 5.1 per cent early last year to 5.7 per cent. That is still lower than 6.4 per cent in New Zealand and 7.9 per cent across the OECD. The Australian Treasury forecasts it to rise to around 6.3 per cent by the middle of next year and stay thereabouts before easing back towards 5 per cent. One consequence has been some moderation, to less haemorrhagic levels, in the rate at which we lose people to Australia.

More recently, though, that picture has changed.

The RBA has cut its official cash rate since late 2011 by 225 basis points to 2.5 per cent, warming up the housing market.

Meanwhile, the Australian dollar has fallen by 14 per cent against the US dollar since April, as global financial markets adjust to the prospective beginning of the end of the US Federal Reserve's quantitative easing and Australia's terms of trade continue to decline.

These developments ought to facilitate the rebalancing or "rotation" of the Australian economy away from growth propelled by very strong rates of investment in the resources sector, which has now done its dash.

Reflecting on this challenge back in July, RBA governor Glenn Stevens pointed in particular to two things capable of taking over as engines of growth: business investment in sectors other than mining, and residential investment.

"Non-mining business investment as a share of GDP has been unusually weak. It is not much above its recession lows of the early 1990s. Many companies ... have been financially conservative over recent years and are sitting on very substantial sums of cash. It's hard to believe that this configuration will not change at some point over the next few years," Stevens said.

Likewise, dwelling investment had been low for an unusually long period, as households shed debt.

"Population growth is quite solid and it has been picking up a bit of late. If anything, we will need to build more dwellings than we have been over recent years. Meanwhile, interest rates are low, dwellings are more affordable, and finance approvals for housing purchases have risen by 16 per cent over the past year."

But Bloxham discerns few signs as yet of significant rebalancing of Australia's growth away from mining, outside of a lift in the established housing market. Residential investment is up, but only by a modest 4 per cent over the past year.

The New Zealand Treasury acknowledges that a softer economy in what is still our largest export market will be negative for New Zealand's growth.

But it points out that for two of the largest exports, crude oil and gold, the impact will be limited as volumes are primarily driven by supply-side factors, while prices reflect global supply and demand.

"However, other goods that form a significant share of exports to Australia, including wine, dairy, processed food, fish, wood products and services, are likely to experience lower growth both in volume and value terms."

Looking beyond that, a successful rebalancing of the Australian economy should be positive for New Zealand. Most of our exports to Australia go to the eastern states.

"A recovery of competitiveness in the non-mining regions along Australia's eastern seaboard will lead to a pick-up in employment and wage growth, which will restore the growth of household demand. A stronger pick-up in Australia's housing supply as the recent RBA rate cuts take effect will directly benefit New Zealand exports of wood products and other building materials," the Treasury said.

Offsetting that, though, is the exchange rate. The New Zealand dollar has gained about A9c, or more than 11 per cent, against the Australian over the past year. With monetary policy on divergent paths between the two countries the exchange rate could strengthen further.

Brian Fallow

The Economics Editor of the NZ Herald

Brian Fallow is the New Zealand Herald's economics editor. A Southlander happily transplanted to Wellington, he has been a journalist since 1984 and has covered the economy and related areas of public policy for the Herald since 1995. Why the economy? Because it is where we all live and because the forces at work in it can really mess up people's lives if we are not careful.

Read more by Brian Fallow

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