Market Update: New Zealand’s economy is set to outpace Australia’s … now what? – Liam Dann – Full Analysis

Kiwis have been heading for greener pastures across the ditch en masse and we’re
constantly looking across enviously at Australia’s savings rate and higher wage economy.

But the numbers are stark.

Forecasts by the Reserve Bank of Australia (RBA) have the lucky country’s annual growth rate dipping to 1.8% by December and then falling to 1.6% by June next year.

The RBA sees it stuck at 1.6% out to June 2028 – which is as far as the forecasts go.

The Australian Financial Review (AFR) described it as a dire warning.

The AFR reports that this “is the lowest medium-term growth outlook ever published in the bank’s forecasting history”.

It notes the RBA has been releasing forecasts since 1990, a period that has included at least a couple of recessions – one in the early 90s and the brief one we all copped when Covid first hit in 2020.

Of course, in New Zealand, we’re far more familiar with recessions.

I think we have a slightly higher bar for our definition of “dire”.

Our Reserve Bank forecasts New Zealand’s GDP to grow at 0.5% for the year to March 2026, but then 2.8% to March 2027, and 3.1% to March 2028.

Westpac economists were even more upbeat in their economic overview last week, tipping growth to hit 3.3% for 2026, followed by 2.7% in 2027.

This isn’t unprecedented, as with our cricketing rivalry, every decade or so, we manage to briefly outperform our Australasian cousins.

Except for the summer tour of 1985-86 (when Sir Richard Hadlee was unplayable), New Zealand’s cycles of cricketing success have tended to coincide with periods where the Aussies aren’t really in great form.

The same is probably true of this economic cycle.

We’re out of sync. We’re on the bounce from cyclical lows. Australia’s coming off cyclical highs.

We haven’t solved all the structural problems that threaten our long-term prosperity.

But with low interest rates and an agricultural export boom, it was inevitable that we’d see a bit of growth.

Meanwhile, across the Tasman, things recovered more quickly after Covid.

The economy has been humming along with GDP growth at above 2%.

The trouble is that Australia’s economy suffers from one of the same structural problems as ours.

Specifically, like us, it has seen productivity fall since Covid and now has a lower capacity for the level of growth it can sustain without generating inflation.

Inflation in Australia hit 3.8% in the December quarter, and the RBA has already had to hike the Official Cash Rate (OCR). The OCR is now at 3.85% and forecast to go higher.

Australia also has a Labor government that hasn’t exactly been inclined to cut spending.

This bit might be a bit contentious, depending on your political stripes, but it is certainly a narrative that’s taken hold in Australia’s centre-right media.

Labor is being attacked for spending at a time when the economy is at capacity, which effectively just crowds out the private sector.

Luckily for Anthony Albanese and his party, there doesn’t seem to be much of a functioning opposition there at the moment.

In New Zealand, we’ve cleverly avoided the capacity issues with our economy by having three recessionary years. We haven’t come close to troubling our potential growth rate, regardless of how low it is now.

That will change, but not for a while.

So what does all that mean?

Cynics will point out that our growth will come off a much lower base.

We’re not about to suddenly become wealthier than Australia.

But we are likely to see a short window where conditions for business are better on our side of the Tasman.

Whether that window translates to any kind of significant catch-up in wages remains to be seen.

It probably depends on how well our respective economies are managed from here.

Australia still has a much lower unemployment rate – it currently sits at just 4.10%. That’s tight and will be putting upward pressure on wage growth.

That’s part of the reason they’ve got more of a battle with inflation going on.

But clearly it’s not so bad if you are a young worker.

Our unemployment rate just rose to 5.4%. Hopefully it has peaked but it will continue to keep a lid on wage growth for some time.

That’s not great for workers, but economists believe it will help with inflation, which they expect to fall back into the Reserve Bank of New Zealand (RBNZ) comfort zone below 3% later this year.

It’s likely we’re going to see the respective labour markets heading in different directions from here.

If the central bank forecasts hold through until 2028, we may actually have a marginally lower unemployment rate than Australia.

The RBNZ has unemployment falling to 4.5% by March, while the RBA has Australia’s rate rising to 4.6% by June 2028.

That’s a pretty marginal difference, but sometimes differences at the margin can have an outsized impact in the real world.

When it comes to how the job market actually feels to the average worker or jobseeker, the direction of travel is important.

In other words, if you’re trying for a pay rise or looking for a job in an economy where the labour market is getting tighter, then it will be harder work than in a market where conditions are getting looser.

Businesses have to look forward when they take on extra staff or shed them – that’s why business confidence surveys are so telling around investment intentions.

A couple of years where job prospects are improving in New Zealand, versus a couple of years where they are deteriorating in Australia, will likely go a long way to correcting the outflow of young Kiwis.

New Zealand might even get its mojo back – whatever that was.

But what then? The economic cycle will turn. Is it possible New Zealand could sustain stronger economic growth for long enough to significantly close the wealth gap with Australia?

That’s going to depend on which nation does a better job of lifting productivity and boosting the potential growth rate of the economy.

With its mining exports, high savings rates and strong financial sector, the odds are with Australia.

But New Zealand has a rare opportunity in the next few years to get itself into better shape with smart policy moves that lift our growth capacity.

The biggest question is whether we have the political will to take it.

Liam Dann is business editor-at-large for the New Zealand Herald. He is a senior writer and columnist, and also presents and produces videos and podcasts. He joined the Herald in 2003.

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