“In all the meetings I’ve had here in New Zealand, the number one topic is labour - as in not enough of it,” says Stephen Halmarick, chief economist at Commonwealth Bank of Australia.
Halmarick - one of two Aussie economists touring New Zealand this month - offers an upbeat assessment of the economic prospects of both nations over the next two years.
Also across the Tasman for his first post-Covid visit was HSBC chief economist for Australia and New Zealand Paul Bloxham.
Bloxham - who famously dubbed New Zealand a "rock star" economy in 2014 - says we can no longer claim that title.
He sees this country dipping into recession early next year, whereas his forecast for Australia is to avoid recession.
Halmarick relies on ASB's forecasts for his New Zealand outlook (CBA is ASB's parent company).
But he is very comfortable with their view that New Zealand will avoid recession, which is in line with CBA's outlook - one he concedes is among the most optimistic among the big bank economists.
For example, CBA is forecasting that the Reserve Bank of Australia's cash rate will only need to go 2.6 per cent - currently the lowest forecast from the banks.
"Most of our competitors think it will go higher than that and [are picking] a more significant downturn," Halmarick says.
"But we think we have the data to back that, and the trend is moving our way."
GDP forecasts aside, both economists broadly agree on the issues and trends facing the two economies.
There is a slowdown coming in both markets as interest rates rise.
And the big issues, on both sides of the Tasman, are: inflation and labour shortages.
Firms in New Zealand are worried about not having enough workers and they are concerned about it all getting worse as the Australian labour market tightens, Halmarick says.
Both countries have seen border closures restrict the flow of migrant workers and both are now seeing demand for labour soar.
"In Australia, the numbers are different but the discussion is very similar," says Halmarick.
As in New Zealand, Australia's net migration is still a long way short of where it was pre-Covid, he says.
"It is a similar story around the world - the US, the UK, Canada. For us there's the back-packers that work the hospitality sector and agri sector.
"Then you've got your foreign students in hospitality and retail. Then there is the skilled permanent migration which pre-Covid was about 100,000 a year," he says.
"The borders have been closed for about three years - so we're about 400,000 short and that has a pretty significant impact."
That sounds ominous for Kiwi companies fearful that worker shortages here will only get worse as our workers are drawn to Australia's job opportunities - and its typically higher wage rates.
"The brain drain does present New Zealand with challenges," says HSBC's Bloxham.
"Both countries have super tight labour markets at the moment and both face this labour shortage challenge. And in Australia's case, the border's reopened and we are getting workers starting to flow."
The one offset is that Australia is also watching as its younger people head off on their international travels.
There's pent-up demand to get out on the big OE and as well, the fact that labour shortages are global means there are plenty of opportunities for young, mobile people.
But despite that, Australia is still getting a net inflow of migrants.
"In New Zealand you're getting some people coming - but you have a net outflow at this stage. I think it's going to present a challenge for the New Zealand economy," he says.
"It keeps the labour market tight and puts pressure on labour market growth ... and feeds through to costs."
Labour costs are one of the reasons both economists see behind the higher inflation rate on this side of the Tasman.
"Some of it is just timing," says Halmarick, who believes Australia is yet to see a peak in inflation.
"We're catching up, in the June quarter our headline [rate] was 6.1 and the December quarter is going to be in the sevens."
In New Zealand, annual inflation hit 7.3 per cent in the June quarter, and most economists expect that will be the peak - or close to it.
"So the gap between Australia and New Zealand is going to narrow in terms of inflation," he says.
"The difference is our wages growth has been quite modest. The unemployment rate has been about the same. We're at 3.5 per cent - the lowest rate since 1974." That compares with 3.3 per cent in New Zealand.
But in Australia, wage growth was still about 2.5 per cent.
It will be 3.5 per cent by next year, says Halmarick.
That's likely to stay lower than New Zealand, where wage inflation, measured by the labour cost index (LCI), was already 3.4 per cent in the year ended June 2022.
In a sign that the trend is upwards, average ordinary-time hourly earnings rose by 6.4 per cent, according to Stats NZ.
"There's no evidence of a wage-price spiral happening in Australia," Halmarick says.
"I guess we were relatively less affected by high energy prices - petrol is a bit cheaper in Australia, the Government did a similar thing to the NZ Government and cut fuel excise in half - but just for six months."
Bloxham is concerned about signs of a wage-price spiral becoming embedded in the New Zealand economy and making inflation harder to shift here.
"I think there are a couple of reasons," he says of Australia's lower inflation rate.
"New Zealand had this really short, sharp shock in the early part of the pandemic," he says. But after the first lockdown, "life got back to a semblance of pretty close to normal.
"In addition to that, of course, you still had all this fiscal support and monetary support.
"In some ways that over-cooked things and that really grew demand to be quite strong.
"Australia had a similar story - but it wasn't quite the same."
Australia had a range of different lockdown experiences across the country. Melbourne, for example, had the longest lockdown in the world, Bloxham says.
"So it was a bit different on the demand side."
Meanwhile, on the supply side, border closures hit New Zealand harder.
"I think closing the border has had a larger effect for a smaller economy that's less diversified. New Zealand is more reliant on that cross-border movement."
That's meant this country has been more constrained on the labour side, and inflation picked up earlier and faster, he says.
"The big challenge is that it's also gotten itself more embedded in inflation expectations and in the wage-setting process as well. So it's a bigger headache for the RBNZ than the headache the RBA faces at this stage."
That means the Reserve Bank will have to lift interest rates higher than its counterpart across the Tasman, and that heightens the recession risk in New Zealand.
"The RBNZ obviously got started earlier, which is helpful, as they're going to have to do more," says Bloxham.
"We have the [NZ] cash rate at 3.5 [per cent] by end of year. That's a little bit below the market [which is picking 4 per cent].
"Nonetheless, that's quite a lot of delivery of pain and tightening of financial conditions," he says.
"You're probably going to have to have a bigger economic slowdown. So we are pencilling in a harder landing around the turn of the year."
A fall in global inflationary pressure, with lower oil and commodity prices, will be quite helpful for both countries, Bloxham says.
"But it will probably be more helpful for Australia, where inflation hasn't quite bedded itself in yet."
It looks as though the Reserve Bank of Australia might get lucky on timing, he says.
The RBA's interest rate hikes will also have a faster effect on the economy, says Halmarick.
"Australians are a bit more sensitive to higher rates, because we have this predominance of variable-rate mortgages."
In contrast, Kiwis tend to be on one- or two-year fixed rates, which means hikes in the official cash rate take longer to flow through to consumers.
Even though the RBNZ moved a lot sooner on rates than the RBA (beginning the tightening cycle in October as opposed to May), because the RBA meets every month, it is catching up fast, he says.
So Australians have had 1.75 percentage points of rate hikes - from 0.1 per cent to 1.85 per cent - in just four meetings across three months.
"We're already seeing house prices falling. Particularly in Melbourne and Sydney. We're already seeing discretionary spending declining," Halmarick says.
But despite the aggressive rate track, it will be a "shallow sort of cycle" in Australia, Halmarick says.
"Growth is being limited - there is a risk of recession - but even though we've got a high cost of living, the offset is the labour market is very tight."
Bloxham agrees that it is difficult to call a recession when unemployment is at record lows.
"I would say to call it a recession, you'd have to have a decent rise in the unemployment rate. Otherwise you just wouldn't call it a recession, you'd call it a downturn or a slowdown."
But he is sticking with his recession call for New Zealand.
He expects higher rates will eventually cause unemployment to rise.
The central banks - here, in Australia and in other places including the United States - will need to lift interest rates until they force an economic slowdown.
"That means a slowdown in consumer spending, that's a fall in house prices ... that slows things down on the demand side and then a likely consequence is that we will see it flow down into labour demand," he says.
"At the same time, the reopening of borders will be more challenging for New Zealand as there will be people moving from New Zealand to Australia."
But eventually, the combination of weaker labour demand and more workers showing up because of migration means the unemployment rate will to rise.
While the two economists disagree on the depth of the downturn, they both remain upbeat about the economic prospects of New Zealand and Australia.
"There are lots of challenges but you'd rather be in Australia or New Zealand than just about anywhere else in the planet," says Halmarick. "The economies are going to continue to grow.
"We're forecasting recessions in the US, UK, Europe and Japan. We're not forecasting recession in New Zealand or Australia," he says.
"Yes, interest rates have to go up and that will slow demand but both economies - in a medium term sense - are well-run with good institutions."
Bloxham agrees.
"Australia and New Zealand have very flexible economies, they have regulatory structures that are very well put together, floating currencies that protect us from a lot of the shocks," he says.
"We're still in the right region, we're tied to the Asian economies. They're the fastest growing economies, the fastest growing region in the world."
Unfortunately, in the short term inflation is well above where it needs to be, he says.
That just has to be dealt with. "Policy makers don't have any easy decisions ... these are hard decisions," he says.
"The best thing to do right now would be to fix the supply challenge, high commodity prices, geopolitical issues, the pandemic itself, but we can't control those."
Then there are the borders.
"We shut them for good reasons during the pandemic, but reopening is going to take some time," Bloxham says.
"To me, policy makers should have a clear-eyed focus on getting people in, which will help to contain the inflation challenge.
“I think we will get through this period. We have strong economies in a structural sense, which will see us shine through and both these economies will be better placed than others.”
