Could the lucky country drag New Zealand down?

Friday, 8 March 2019

Tourists walk across the Sydney Harbour Bridge. For close to a generation, Australia has offered support to the New Zealand economy, but now it is looming as a potential weakness.

ANALYSIS: When the global financial crisis hit, the Australian economy powered ahead, cushioning New Zealand from an even deeper recession.

Our proximity to the 'lucky country' has consistently been a source of momentum for New Zealand's exporters for nearly a generation.

But economists are increasingly seeing Australia as a major risk, as a trading nation even more exposed to China slows.

Official figures released this week showed Australia recorded a second consecutive quarter of weak economic growth, making the second half of 2018 the slowest six months of growth in more than a decade.

With the expansion falling below Australia's rate of population increase, commentators described it as a 'per capita recession'.

Stephen Toplis, head of research at BNZ, said in a world where there were a number of potential dangers to New Zealand steady expansion, from the impact of Brexit to the United States-China trade war, Australia was looming as the largest potential problem.

One of Toplis' main concerns about Australia's impact on New Zealand, is actually China. Even using Beijing's official forecasts, which are widely believed to have exaggerated its expansion, the Chinese economy is growing at the slowest rate in almost 30 years.

The world's most populous economy is also changing, from one driven by investment in areas such as infrastructure, to one driven more by consumer consumption.

This will hurt Australia more directly than New Zealand, Toplis said, because whereas we tend to export soft commodities such as food, Australia is more exposed to China through hard commodities such as minerals.

But their problems will get here eventually, potentially causing more pain.

'If you link Australian weakness to the weakness in China, then obviously, we sort of get hit twice,' Toplis said.

'The impact of a slowing China on Australia could be more problematic for New Zealand than the impact of China directly on New Zealand.'

Although China is now New Zealand's largest export market, our trading relationship tends to be deeper and more complex, including being our largest buyer of services.

With Australians accounting for almost half of our international visitors, a sharp drop in consumer confidence could hurt the tourism sector especially.

Households across the Tasman are likely to be feeling progressively poorer as they feel the impact of a sharply cooling housing market.

At the start of the year, house prices in Sydney had already fallen by more than 10 per cent.

Recently Westpac Australia's chief economist Bill Evans warned of the so-called 'negative wealth effect' of homeowners seeing their equity disappear, as he warned house prices in the major Australian cities could fall by up to a further 10 per cent this year.

It came as Evans predicted that the Reserve Bank of Australia would cut the Australian cash rate twice this year.

This puts him offside with the economists at the other major Australian banks. But were it to happen, pressure would be heaped upon the Reserve Bank of New Zealand to also cut interest rates if the currency surged.

This week the kiwi dollar crossed A96.5 cents, close to the highest in two-and-a-half years, around the level at which talk begins that we could again near parity.

Cameron Bagrie, the former ANZ chief economist said the problems faced by our larger neighbours may not have dawned on the markets.

'I think there's a hell of a lot of complacency across Australia. They're just used to everything working out fine.'

Bagrie said while the Australian economy had, on face value, been growing strongly in recent years, producing enough jobs to keep unemployment low, some concerning problems were emerging.

Household debt, at around 200 per cent of disposable income, was considerably higher than in New Zealand. The current account had deteriorated. The Federal Government, though a period of uninterrupted growth since the early 1990s, had run more than a decade of deficits.

'There's just some disturbing signs under the bonnet. The headline numbers, GDP [economic growth] and employment, still look okay. But if you look at some of the structural indicators and overlap that you're seeing in the Australian property market, some red lights are really starting to flash,' Bagrie said.