If you’re looking for a last-minute overseas summer getaway, New Zealand is looking increasingly attractive.
While the Australian dollar plumbs a two-and-a-bit-year low against the US greenback and a four-and-a-half-year low against the British pound, we’re slightly up on the Kiwi dollar today.
The reason? New Zealand has just dived back into recession.
If Aussies thought our growth of just 0.3 per cent last quarter and 0.8 per cent over the year to September was anaemic — and it was the worst annual number outside the pandemic since the early 1990s recession — then spare a thought for our cousins across the ditch.
New Zealand’s economy shrank 1 per cent in the September quarter alone.
That would have already cemented a return to recession but, adding insult to injury, the statistics bureau revised down the previous quarter’s contraction from 0.2 to a whopping 1.1 per cent.
New Zealand’s economy has shrunk 1.5 per cent over the past year. These are depressionary levels of economic contraction.
Aggressive central bank collides with conservative government
Why is the Kiwi economy such a disaster?
In short, a super-aggressive, inflation-fighting central bank collided with the October 2023 election of what has been described as New Zealand’s most conservative government in decades, which came to office with a commitment to slash public spending.
That’s a commitment it has fulfilled, with public spending dropping 1.9 per cent in the September quarter, a stark contrast to Australia’s growth in government outlays.
But, if that was supposed to free up space for the private sector, it chose not to use it. Business investment plunged 3 per cent, falling for the sixth quarter in a row and now 8 per cent below where it was a year-and-a-half earlier.
On the monetary policy front, the Reserve Bank of New Zealand (RBNZ) started lifting its cash rate from COVID-19 lows of 0.25 per cent in October 2021 — a full seven months before Australia’s Reserve Bank.
The Kiwis then lifted their cash rate to a peak of 5.5 per cent by May 2023, a time when Australia’s benchmark interest rate was still at 3.85 per cent. The RBA maxed out at 4.35 per cent in November 2023.
Many commentators at the time were urging Australia to follow our trans-Tasman neighbours higher to get inflation under control faster, but the RBA resisted, saying it wanted to hold onto more of its post-COVID job gains even if it meant inflation took longer to come back down.
In hindsight, that looks increasingly like the right call.
While New Zealanders may have been “enjoying” rate cuts since August this year, their cash rate only fell below Australia’s on November 27.
Even then, at 4.25 per cent, it’s pretty much the same for all practical purposes.
The RBNZ isn’t scheduled to meet again to consider interest rates until the same week as the RBA in mid-February. Goodness knows what the Kiwi economy will look like by then.
New Zealand only measures its unemployment rate quarterly — it was 4.8 per cent in September.
Australia’s jobless figure most recently clocked in November at 3.9 per cent, and that’s after absorbing tens of thousands of Kiwis who’ve fled across the ditch in search of work over the past year.
JP Morgan economist Tom Kennedy couldn’t avoid a hint of understatement when noting that “NZ’s economic performance is much worse than previously thought” with “no redeeming features in the detail”.
It hasn’t helped the Conservative government’s budget either.
“This week’s mid-year budget update revealed a broad-based deterioration across the forecast horizon, increasing deficit projections by roughly 1 per cent per year from FY [financial year] 25–FY28,” Kennedy observed.
“The deterioration in the fiscal position means the government now has fewer levers to pull to stabilise growth and places more of the burden on monetary policy.”
So, the upside for New Zealanders is that they can expect much lower interest rates next year.
The downside is that it’s come at the cost of two recessions in the past two years and a surge in joblessness that will surely only get much worse.
It seems the RBNZ forgot two key principles — monetary policy operates with long and uncertain lags, and fiscal policy is also key for the economy.
Why a Fed rate cut sent the US dollar soaring and shares tumbling
New Zealand’s central bank started cutting interest rates in August, but that turns out to have been many months too late. (ABC News: Alistair Kroie)
These are lessons that don’t appear to be lost on the RBNZ’s bigger sibling across the ditch, nor the mother of all central banks, the US Federal Reserve.
The Fed today cut interest rates by a further 0.25 of a percentage point to a range of 4.25–4.5 per cent — pretty similar to Australia and New Zealand — despite an economy that seems in fairly robust health with unemployment recently edging up to 4.2 per cent and annual inflation at 2.7 per cent.
Starting in September, it has lowered its cash rate three times, and by a total of 1 percentage point, from its peak of 5.25–5.5 per cent.
Unlike New Zealand, it started cutting its cash rate while inflation was still higher than its target and the economy strong.
Although it didn’t know it when it started cutting rates in August, the annual inflation rate in New Zealand was 2.2 per cent over the year to September, well within its 1–3 per cent target.
But the Fed sent share and currency markets into a spin today with another forward-looking act.
Its committee members and chair Jerome Powell sent out a clear message to markets not to expect too many more rate cuts next year.
NAB markets economist Tapas Strickland pointed out that the Fed Open Market Committee’s widely watched “dot plot” has just two further rate cuts forecast for 2025, down from four the last time they published their views a few months ago.
Half of the committee now see the “neutral” cash rate — which neither stimulates nor slows the economy — at 3.5 per cent or above.
Markets are now betting on Fed interest rates bottoming out around 3.75 per cent two years from now.
That sent the US dollar up sharply, with the Aussie currency falling to 62 US cents, a low not seen since October 2022.
It also sent the major US share indices down 2.6–3.6 per cent, with the Nasdaq hardest hit because risky tech stocks look a lot less attractive when “risk-free” interest rates are higher.
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What does all this mean for Australian interest rates?
It probably means that the RBA made the right call not to hit inflation harder with sharper interest rate hikes.
The New Zealand experience is also a salutary reminder to the RBA of the risks of waiting too long before cutting rates because of the year-plus lags in monetary policy moves taking full effect.
However, the Fed’s latest communications also hint that, even if the RBA does decide to act early and start cutting rates in February, it probably won’t be cutting them fast or far.