Will NZ or Australia’s economy bounce back faster?

How does New Zealand’s economy stack up against Australia’s?

That’s a question Westpac senior economist Satish Ranchhod has been working to answer.

He has released new research which compares the two trans-Tasman economies.

There was some good news for this side of the ditch – economic growth was likely to be modest in Australia over the coming year, he said, but New Zealand’s was expected to pick up to more normal levels, with stronger per capita GDP growth over the next few years.

Ranchhod said GDP growth in New Zealand was forecast to hit 2.4% by the end of this year and 3.1% next year, on the back of cuts to the official cash rate.

Increases in commodity export prices would also help.

The Australian economy was expected to grow 2% this year and 2.2% in 2026. Public sector spending, which boosted demand over the past year, was slowing with fiscal pressures constraining public sector investment plans.

But New Zealand was building from a much lower base.

The country had a more significant downturn in recent years, due to the sharp increase in the official cash rate.

Australian rates had risen less.

“Australia has had firmer economic conditions over the past couple of years and even though growth in New Zealand is picking up, I think Australia is going to see some firmer conditions than us, especially in terms of the labour market, where unemployment is going to remain lower,” Ranchhod said.

“Australia had a less aggressive response to the pandemic.”

New Zealand’s unemployment rate is well above average but unemployment in Australia remains relatively low.

This country is forecast to have wage growth of 2% over 2026, compared to 3% in Australia.

Wage growth

“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 said.

“I think there’s a few things to keep in mind, though. Over time, those economic fundamentals change a bit and we still see people coming into New Zealand.

“It’s also worth keeping in mind that a lot of the people who are leaving from New Zealand now and going to Australia were relatively recent migrants to New Zealand themselves. A lot of them came over from other countries on temporary work visas. They chase where the job opportunities are and it’s natural that they do move now that the employment situation is changing again.

“Australia still has a relatively tight labour market and that is going to provide a floor under wage inflation. It’s going to increase that differential between the New Zealand and Australian job markets, meaning we’ll probably still see a few people heading that way.”

He said the improvement in growth over the coming year in New Zealand would help the labour market. “But we are starting from a pretty soft position so it’ll be a little while before we see those wage differentials narrow.”

Households’ spending had slowed in both Australia and New Zealand.

It was expected to recover faster over the coming year in New Zealand.

New Zealand businesses were also more confident, expecting rate cuts to boost recovery in activity.

Australia had a trade deficit of about 2% of GDP in the year to March, a turnaround from recent years where the country has had a surplus.

New Zealand’s current account deficit was 6% of GDP in March, compared to a peak of 9% and a forecast of 4% in 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 going forward.

“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.”

rnz.co.nz