Next year’s outlook for the New Zealand and Australian economies is the same as this year’s – we are expected to outperform our Tasman neighbours once again.

The downturn in dairy prices is a concern in New Zealand, but it doesn’t match the gloom in Australia over plunging resource prices, a huge government deficit and shrinking consumer confidence.

This year has been a good one for New Zealand with economic growth of 3.2 per cent compared with 2.7 per cent in Australia.

But the real progress in New Zealand has been in people terms. Our unemployment rate has fallen from 6.2 per cent to 5.4 per cent, while Australia’s unemployment rate has risen from 5.8 per cent to 6.3 per cent.

New Zealand has one of the lowest unemployment levels in the OECD, against the average of 7.2 per cent.

Australasian unemployment rates have had a big effect on migration flows across the Tasman.

There was a net migration outflow from New Zealand to Australia of only 4542 in the year to last month, compared with a net outflow of 22,081 a year earlier and 38,846 in the November 2012 year.

This has been a major contributor to the surge in New Zealand’s migration inflow to 49,836 in the latest year compared with 19,478 in the November 2013 year and a net outflow of 1567 a year earlier.

New Zealand’s unemployment rate is expected to fall further next year – and Australia’s to rise – so the net migration outflow from New Zealand to Australia will continue to fall and should turn into a net inflow.

This should give the New Zealand economy a boost over the next twelve months.

The big issue in Australia is the sharp decline in prices for iron ore and other resources.

Iron ore prices, which have fallen from US$136 a tonne a year ago to US$68 a tonne, have a major effect on the Australian economy for several reasons including:

Iron ore is Australia’s largest export, totalling 25.5 per cent of the country’s exports.

Iron ore producers are significant taxpayers and Government forecasts estimate the slump in prices will reduce the Australian government’s tax revenue by A$18 billion ($18.9 billion) over the next four years.

The slump in prices will lead to a significant reduction in resource sector capital expenditure which has been a major driving force behind the Australian economy.

As well, there has been a major slump in the prices of coal, which is 13.8 per cent of Australia’s total exports, and oil and natural gas, which are just over 11 per cent of exports.

The decline in oil prices, which is an effective tax cut in New Zealand, will lead to a reduction in Australia’s export revenue.

The sharp decline in resource prices has had a major effect on Australia’s export revenue and its government’s tax revenue.

The Commonwealth Government’s Mid-Year Economic and Fiscal Outlook 2014-15 (MYEFO), out this week, shows the Budget deficit is expected to blow out to A$40.4 billion (2.5 per cent of GDP) in the June 2015 year, up from a Budget night deficit forecast of A$29.8 billion (1.8 per cent of GDP).

The report says: “Iron ore prices have unexpectedly fallen by over 30 per cent since the Budget. MYEFO assumes a free-on-board iron ore price of US$60 per tonne over the next two years, which compares with a spot price of US$95 at Budget. The fall in iron ore prices has led to company tax receipts being revised down by A$2.3 billion in 2014-15 and A$14.4 billion over the following [three] years.”

The report was greeted with gloom and doom across the Tasman. One commentator lamented that 23 years of solid Australian economic growth had come to an end.

The Australian Government is now expected to have a large Budget deficit for several years. This is a significant deterioration in the deficit outlook since the May 13 Budget announcement.

The mid-year outlook report keeps the June 2015 year GDP growth forecast steady at 2.5 per cent but has increased its unemployment rate forecast from 6.25 per cent to 6.5 per cent. It is also forecasting a significant deterioration in the country’s terms of trade.

In New Zealand, the Treasury issued its Half Year Economic and Fiscal Update this week. This is a much more upbeat document than its Australian equivalent.

The Treasury wrote: “Economic activity expanded at a solid pace in the year to June 2014, growing 3.5 per cent, and is expected to grow at a similar pace in the next two years underpinned by domestic demand. The key drivers are residential construction, business investment and population growth.”

New Zealand’s unemployment rate is forecast to decline from 5.4 per cent to 5.1 per cent and the Government is expected to have a Budget surplus equal to 0.2 per cent of GDP in the June 2016 year.

This compares with a projected Australian Government Budget deficit equal to 1.9 per cent of GDP for the same period.

The downturn in dairy prices will have a huge impact on farmer income but there are two important differences between iron ore in Australia and dairy in New Zealand.

First, dairy farmers are not big tax payers, particularly compared with Australian mining companies, and the NZ government is not expecting a large decline in tax revenue because of the dairy industry slump.

Second, economic activity (real GDP) is largely unaffected as milk production will continue to grow.

So the slump in dairy prices is expected to have less of an effect on the NZ economy than lower iron ore prices will in Australia. This is mainly because of our expected strong net migration inflow due to falling unemployment here and rising unemployment in Australia.

Comparison of the figures shows the New Zealand economy is performing better than Australia in most areas. It has higher GDP growth, lower unemployment, lower inflation and a much better Government Budget situation.




New Zealand

GDP Growth

Sept ’14 year



Unemployment rate








Consumer confidence




Official cash rate (OCR)




Budget deficit

June ’15 year (%   GDP)




Year to date




The strong performance of the NZ dollar against the Australian dollar shows overseas investors take a similar view, although our higher interest rates are another attraction.

ANZ-Roy Morgan Consumer Confidence figures reflect the different moods on either side of the Tasman.

New Zealand consumer confidence went up from 121.8 in November to 126.5 in December, prompting ANZ chief economist Cameron Bagrie to note that “we’re happy little campers heading into the holiday season”. The report said our confidence was widespread.

But the same index in Australia fell 0.2 points to 110.2, mainly because consumers there believe the outlook for Australia as a whole is negative.

Unsurprisingly the NZX had been a far better performer this year than its Australian equivalent with a gross return of 16.5 per cent this year against a gross return for the ASX benchmark index of 1.5 per cent this year.

The biggest threat to the New Zealand economy is that 2015 will be too good, mainly because residential prices keep going higher and higher at an accelerating rate.

The clear lesson from the 1980s sharemarket boom is that asset price bubbles can leave a dreadful and long lasting hangover.


Brian Gaynor

Portfolio Manager