Australia’s economic growth helped soften the effects of the global financial crisis on New Zealand. Now there are signs that our recession-proof western neighbour is nonetheless changing down a gear.
Third quarter growth across the Tasman was 0.2%, less than half the expected pace and the weakest in about two years. Retail spending actually fell in October, the month the Reserve Bank of Australia surprised markets by not raising interest rates.
Trade figures underline the importance of demand in Australia for economic prosperity in New Zealand. It takes almost a quarter of this country’s annual exports, at $9.9 billion in the year through September. That’s more than twice the combined take of China and the U.S.
But Australia’s own trading position, underpinned through the GFC by China’s demand for raw materials, is being undermined by a currency that has advanced 10% against the greenback this year and reached parity last month for the first time since 1982.
With its currency climbing, Australia’s exports fell 2.4% in the third quarter, shaving 60 basis points off gross domestic product. Construction also weakened.
Meanwhile, the New Zealand dollar has fallen against its Australian counterpart in recent months, declining almost 6% from its high above 82 Australian cents, reached in July.
The key to the trans-Tasman neighbours’ fortunes may yet be the continued growth of China’s economy and its seemingly insatiable hunger for raw materials. But that growth factor is subject to Beijing’s determination not to let its economy overheat.
The International Monetary Fund provides some reassurance, forecasting China’s gross domestic product to expand 9.6% next year, helping Australia’s economy grow an estimated 3.5%, from 3% in 2010.
Likewise, New Zealand’s growth is forecast to pick up to 3.2% next year from 3% in 2010, according to the IMF’s World Economic Outlook in October.
In both economies, growth has been patchy, with risks to the outlook keeping both central banks on the sidelines, until at least the first quarter of 2011.
For now, benchmark interest rates in Australia and New Zealand are effectively topsy-turvy. The RBA’s cash rate target is 4.75% to the RBNZ’s 3%, a reversal of the position for much of the last decade, where New Zealand’s official cash rate has typically been higher.
The inversion started in April 2009, when Governor Alan Bollard cut the OCR to a record low 2.5%, then held rates unchanged for a full 12 months, while the RBA resumed raising its target rate in October last year. The current gap of 1.75 percentage points is the widest in Australia’s favour since the New Zealand OCR was introduced in March 1999.
The gap is likely to narrow in the next 12 months, based on bets financial market participants are making. Traders see the RBA raising its key rate by 22 basis points over the next 12months, while the RBNZ is seen having 58 basis points of increases locked and loaded, according to the Overnight Index Swap curves – one of the best indicators of where interest rates are likely to head.