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Monthly Economic Indicators

Special Topic: Australia

This Special Topic focuses on the performance of the Australian economy.

Australia is New Zealand’s most important trading partner …

Australia is the destination for just under a quarter of New Zealand’s merchandise exports. In addition it is a key source country for visitors with 1 million short-term arrivals from Australia (or 41% of total arrivals) occurring over the past year. Australia is also the source of $87 billion of foreign investment in New Zealand (as at March 2008). This represents just under one third of total foreign investment in New Zealand and is well ahead of the next largest contributor, the United States at $48 billion. Therefore developments in the Australian economy are of particular importance for New Zealand.

… and one of the few developed economies to avoid a decline in GDP in the March quarter

Australian real GDP increased by 0.4% in the March 2009 quarter, a significantly stronger result than most other developed countries. Increases occurred in both private and public consumption, public investment and exports, while imports fell sharply.<\p>

Figure 6 - March quarter real GDP growth
Figure 6 - March quarter real GDP growth.
Source: Datastream, Statistics NZ

Significant fiscal stimulus …

Household incomes have been boosted by fiscal stimulus initiatives with the Australian government’s Economic Security Strategy and National Building and Jobs Plans being key planks of their overall fiscal stimulus. Such measures have included one-off cash payments, increased assistance for first-home buyers and increased pension rates (although from 2017 the pension age will start to rise to 67), increased investment in schools, housing, energy efficiency and infrastructure.

The 2009 Australian Budget notes that the stimulus packages are expected to support the level of GDP by 2¾% in the year to June 2010 and 1½% in the year to June 2011. Household consumption is expected to experience a relatively minor contraction over the June 2010 year with stimulus measures estimated to add 1¼% to the level of private consumption in the 2009 and 2010 June years.

The strong fiscal position of the Australian government combined with a smaller current account deficit, which has recently narrowed to 3% of GDP, has enabled this considerable fiscal stimulus while maintaining its strong credit rating. The Australian government will run underlying cash deficits that reach nearly five percent of GDP during 2009/10 and 2010/11 before narrowing so that the budget returns to surplus in 2015/16. Net debt is expected to peak at around 14% of GDP.

… and monetary policy have softened the impact of the global financial crisis

The Reserve Bank of Australia (RBA) reduced its cash rate by 425 basis points between September 2008 and April 2009 to 3.0%. The transmission of these policy changes to households has been both rapid and large with the great majority of this (around 385 basis points) flowing through to variable rate mortgages – the favoured mortgage type in Australia.

Exports holding up on strong demand from China

To date Australia’s exports have surprised to the upside. In the six months to March 2009, Australian merchandise export volumes increased 1.8%. This contrasts with declines of almost 10% (the United Kingdom) to 37% (Japan) in other major countries. New Zealand has seen a relatively small decline in its merchandise export volumes of 0.7% over the same period.

While part of the relative strength in Australian exports is due to improved agricultural production, demand from China has held up well. A large proportion of iron ore is exported to China and exports of coal are increasing, reflecting strong Chinese demand for infrastructure projects. As prices for iron and coal have fallen from earlier highs, Australia has gained market share from the closure of high-cost mines in China. Iron ore exports to China have rapidly recovered after a sharp decline late last year and are now at record levels (Figure 7). Concerns have emerged that there may be a pause in Chinese stock rebuilding.

Figure 7 - Australian iron ore exports
Figure 7 - Australian iron ore exports.
Source:  Australian Bureau of Statistics, RBA

As China’s domestic economy grows and is supported by fiscal stimulus, countries that supply inputs to Chinese consumption and investment will benefit the most. A high proportion of Australian exports remain in China (around 80%). A relatively high proportion (around 70%) of New Zealand’s exports also remain in China.

Second half of year likely to be softer …

Figure 8 - Australian confidence
Figure 8 - Australian confidence.
Source:  Melbourne/Westpac, NAB

The Australian economy has not completely avoided the fallout from the global financial crisis. Taking the six months to March as a whole, GDP has contracted slightly. Private consumption has been soft by recent standards but stronger than in the first half of 2008. However, business investment fell around 6% in the March quarter. Both business and consumer confidence took a substantial knock during 2008 and while both have recovered significantly, as reality turned out not as bad as first feared, confidence still remains low by historical standards (Figure 8).

Household spending is likely to weaken as 2009 progresses. There will be no repeat of the one-off payments households received from the government. The terms of trade will fall further, as lower commodity prices are received, particularly for coal and iron ore. These declines are significant with coal prices down 44% to 60% and iron ore prices down 33% to 44%, but even with such falls remain favourable by historical standards. The Australian Treasury expects the lower terms of trade to subtract 3 percentage points from nominal GDP growth in 2009/10 (or nearly A$35 billion), lowering national incomes.

Households will come under pressure from rising unemployment, the rate of which has risen from 3.9% to 5.7%, although recent developments suggest that the unemployment rate may not reach the 8% figure some are forecasting.

… but overall outlook one of the best in the OECD

Despite further slowing later this year, the Australian economy is likely to be one of the better performing economies. This reflects factors mentioned earlier, including continued Chinese demand. In addition, the Australian banking system remains amongst the most robust in the world. The latest OECD forecasts predict Australia to be the top performing economy in 2009 and among the best in 2010 with a 0.4% contraction in real GDP over 2009 and a 1.2% increase in 2010. While a friendly rivalry will always exist between New Zealand and Australia, a relatively high-performing Australian economy is a definite benefit for New Zealand.

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