• When we last peeked over the Tasman in late 2024, the Australian economy was enjoying more robust economic conditions than New Zealand, with firmer GDP growth and a stronger labour market.
• Jump forward a year and we are now moving into a new phase of the economic cycle, with economic growth in New Zealand set to outpace Australia over the next few years.
• These diverging economic trends in New Zealand and Australia in large part reflect differences in monetary policy.
  • The Reserve Bank of New Zealand’s earlier aggressive tightening of policy meant that we experienced a sharper downturn in growth in recent years. However, now that inflation has dropped back, the RBNZ has also been able to cut rates faster. The OCR has already been cut 250bps, and we expect two more 25bp cuts before the end of this year.
  • In contrast, the Reserve Bank of Australia took a more gradual approach to tightening policy which helped to support growth and the labour market in previous years. However, its easing cycle has also been more gradual. The RBA has only cut its cash rate 75 bps to date, with interest rates across the Tasman still at mildly restrictive levels.
• But even with larger interest rate reductions on this side of the Tasman, economic conditions in Australia look set to remain firmer than in New Zealand for some time yet.
  • New Zealand’s sharper downturn over the past year means that our economy has a much greater degree of spare capacity than in Australia.
  • That difference in the underlying strength of economic conditions is most clearly evident in the labour market. At 5.2%, unemployment in New Zealand is well above average. In contrast, unemployment in Australia remains relatively low at 4.2%.
  • That difference is set to persist for some time, even with the forecast recovery in economic growth in New Zealand.

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