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Monthly Economic Indicators

Special Topic:  The Australian economy

This special topic examines the recent economic performance of Australia.  The Australian economy is an important influence on New Zealand due to linkages in trade (Australia is a key market for manufacturing and service exports), migration (the destination for most New Zealand emigrants is Australia) and financial markets (most banks in New Zealand are Australian-owned).

The Australian economy expanded strongly …

The Australian economy has experienced a long period of strong expansion (Figure 4).  Real GDP in Australia has grown in each of the last 16 years at an average rate of 3.7% per annum, making it one of the strongest performers in the OECD over this period.  Most recently, Australia has seen a rebound in growth from 2.7% in 2007 to 4.4% in 2008 (March years).  By comparison, annual economic growth in New Zealand since 1991 was slightly lower (3.4%) and exhibited more volatility, partly due to a fall in real GDP in 1998 (due to a larger impact from the Asian Financial Crisis, tight monetary policy and consecutive droughts).

Figure 4 – Real GDP growth
Figure 4 – Real GDP growth.
Source: Statistics NZ, Australian Bureau of Statistics

Domestic demand has driven economic growth in Australia in recent years.  While export growth in Australia has been dampened by a high exchange rate and low agricultural production due to drought conditions, consumer spending and investment have risen strongly as a result of factors such as a higher terms of trade, strong employment and wage growth, and high population growth.

… as the terms of trade surged upwards …

An important driver of recent developments in the Australian economy is a strong rise in the terms of trade.  The terms of trade in Australia rose 41% in the past five years after falling over much of the 1990s (Figure 5).  This strong rise has led to high growth in national incomes.

The terms of trade in Australia have been lifted by sharply rising prices for commodity exports, which have benefited from a range of factors, especially growth in developing economies.  World prices for Australian commodity exports rose sharply in the last five years, led by base metals.  Prices for food commodities, which dominate commodity exports from New Zealand, also rose but not by as much as non-food commodities, hence the smaller rise in the terms of trade in New Zealand.  Prices for Australia’s commodity exports have lifted further since the start of 2008 so, given the lags between spot prices and actual export prices, the terms of trade in Australia are expected to continue rising.

Figure 5 – Terms of trade
Figure 5 – Terms of trade.
Source: Statistics NZ, Australian Bureau of Statistics

… and a tight job market lifted wage growth …

The labour market has tightened considerably in Australia, with the unemployment rate falling to an historic low of 4.0% and the rate of labour force participation rising to a record high of 65.4% in early 2008.  The tight labour market in Australia has seen wage growth rise steadily.  New Zealand had a similar experience, with the unemployment rate falling to a 21-year low of 3.4% in late 2007 (Figure 6) and the labour force participation rate rising to a record high of 68.8% in early 2007.

Strong population growth has also helped drive the Australian economy.  Annual population growth in Australia (1.3%) was higher than in New Zealand (1.1%) over the last decade on average, and it was much steadier (1.0% to 1.5%) than in New Zealand (0.5% to 2.0%).  Net permanent and long-term migration exhibited more volatility in New Zealand over this time, partly because of volatility in the number of New Zealanders moving to Australia.

Figure 6 – Unemployment rate
Figure 6 – Unemployment rate.
Source: Statistics NZ, Australian Bureau of Statistics

… leading to growing inflationary pressures …

Strong domestic demand has led to heightened capacity constraints and inflationary pressures in Australia, as well as in New Zealand.  Consumer price inflation averaged 3.0% per annum in both nations during the three March years from 2005 to 2008, which is at the top of the medium-term target ranges of 2-3% for Australia and 1-3% for New Zealand.  Sharp rises in commodity prices, particularly for oil and food, have added further to consumer price inflation recently.  In the year to March 2008, consumer price inflation rose to 4.2% in Australia (compared to 3.4% in New Zealand) and may rise further in the short term (Figure 7).

Figure 7 – Consumer price inflation
Figure 7 – Consumer price inflation.
Source: Statistics NZ, Australian Bureau of Statistics

… but the outlook is for weaker growth

The economic outlook for Australia has weakened since the start of 2008.  In the May 2008 Budget, the Australian Treasury forecast economic growth in Australia to decline to 2¾% in the June 2009 year as higher interest rates lead to a slowing of domestic demand, especially consumer spending.  Interest rates have risen in the past year as a result of four official interest rate increases by the Reserve Bank of Australia and because of tighter credit conditions in global financial markets. 

There are also positive influences that will ensure ongoing, albeit lower, economic growth in Australia.  The Australian Treasury forecast the terms of trade to rise a further 16% in the June 2009 year and expect the labour market to stay tight.  Ongoing growth in the Australian economy will continue to benefit New Zealand in the coming year, just not as much as in the past year.  As outlined in the Budget Update, this economic growth, and a lower exchange rate against the Australian dollar, will benefit New Zealand exporters, particularly those exporting non-commodity goods to Australia and providers of export services (ie, tourism).  Further, some of the factors that are expected to benefit Australia, including high commodity prices, a tight labour market and recovery from drought, are likely to also benefit New Zealand in the coming year.

However, there are important downside risks to the outlook for the Australian economy, largely stemming from turmoil in global financial markets and the risk of a downturn in the United States economy leading to a sharp slowing of economic growth in Asia.  If they eventuated, these risks could see continued credit constraints and a large fall in export prices (and thus the terms of trade) in both Australia and New Zealand.

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