New Zealand’s economy—which is emerging from what Treasury admits is a “protracted recession”—is set to outperform Australia’s, according to the latest Westpac forecast.
The banks’ senior economist, Satish Ranchhod, has released new research comparing the two trans-Tasman economies and says Australia will be outperformed by its neighbour in the next few years.
He is forecasting GDP growth in New Zealand will reach 2.4 percent by the end of this year and 3.1 percent next year, spurred by Reserve Bank of New Zealand cuts to the official cash rate.
The central bank has cut rates faster than Australia’s, with a 225 basis point reduction to date from a peak of 5.5 percent in May 2023.
A further cut of at least 25 basis points is likely to come before the end of 2025. Increases in commodity export prices would also provide a boost.
Over time, those factors will help increase both domestic demand and employment.
In contrast, the Reserve Bank of Australia took a more gradual approach, with the cash rate having only been cut by 75 basis points since the start of this year, leaving interest rates at what Ranchhod calls “mildly restrictive levels.”
That means that while Westpac is forecasting the Australian economy will also grow, it will be at the lower rate of 2 percent this year and 2.2 percent in 2026.
Public sector spending, which has boosted demand over the past year, is now slowing, with fiscal pressures constraining public sector investment plans. The private sector’s growth in demand has been gradual to date.
However, it’s not all good news for New Zealand. Ranchhod says despite the slower pace of monetary easing and cooling economic growth, Australia’s economy and labour market have remained stronger than New Zealand’s, and that’s set to continue for some time yet.
That reflects the firmer economic conditions in Australia, which are continuing to support employment even as growth cools. Australia also had a less aggressive response to the pandemic, leaving its economy in better shape.
New Zealand has also seen a stark slowdown in wage growth over the past year, with only a modest increase of around 2 percent expected over 2026.
Unemployment has risen to 5.2 percent, well above the long-run trend of around 4.5 percent. In Australia, unemployment is forecast to rise from 4.2 percent to 4.5 percent, which is a little above trend levels.
That’s one factor driving emigration across the Tasman.
“Australia does have a stronger labour market. It is seeing stronger wage growth. We are seeing a lot of people leaving New Zealand for the other side of the ditch,” Ranchhod told media.
But he said a lot of the people leaving for Australia were relatively recent migrants to New Zealand themselves, and had entered on temporary work visas.
Business and Household Spending Down
Household spending has slowed sharply in both countries over the past year due to continued cost of living increases, as well as other financial headwinds. But over the coming year, Ranchhod expects spending to lift in both countries.However, New Zealand is expected to see stronger growth, consistent with the more pronounced easing in interest rates and likely faster recovery in economic growth.
Recent business surveys have shown a downturn in trading conditions in both New Zealand and Australia, with the former always faring worse.
That’s been reflected in weaker investment spending and hiring. But Ranchhod says business confidence is now higher in New Zealand than in Australia, with interest rate reductions adding to expectations for a recovery in activity over the coming year.
“Those strong commodity prices that Australia saw did give them a pretty solid boost to their earnings in the last few years, that is going to continue supporting them in the future, but New Zealand is also seeing some good export returns,” Ranchhod said.
“We’re of course seeing some strong demand for commodity exports like dairy, and going forward, I think that all that difference between our two economies on that trade front is going to look less stark. We’re definitely seeing some improving conditions for our exports,” he said. Hence the price of butter.
And as if spurring economic rivalry wasn’t enough, the cover of Ranchhod’s report features a photo of a pavlova, the creation of which has long been disputed between the two countries.
