Australia and New Zealand Continue to Head in Different Directions It’s going to be a very important year for Australia and New Zealand.

Australia and New Zealand Continue to Head in Different Directions It’s going to be a very important year for Australia and New Zealand. Both economies face many trials in the year ahead, but New Zealand may emerge as the victor in the Trans-Tasman battle for growth.In Australia during 2013-14 a strong property market showed potential to spur economic growth in the broader economy, but the rest of the economy failed to respond and activity at the ground level remains restrained. This is set against a backdrop of retreating mining investment and falling key commodity prices, which doesn’t bode well for Australia’s all-important resources sector. It’s not all doom and gloom Down Under, however. There is some hope that a falling exchange rate and accommodation monetary policy will carry the economy through 2015. Since September 2014 the Australian dollar has taken a mauling, with AUDUSD down over 10% at the time of writing (this report was written in early December). The onus is on policymakers to help support the economy and foster sustainable economic growth.

Further monetary policy loosening by the RBA next year should keep the economy from stalling, but GDP growth may fall to around 2.5% in 2015. This assumes the exchange rate remains in the low 0.8000’s and commodity prices don’t fall off another cliff. In NZ, the economy is much better situated to deal with threats to growth originating from falling commodity prices and even lackluster global commodity demand. NZ is heavily reliant on certain commodity exports, particularly dairy products. However, NZ has other avenues of growth to fall back on.Rebuilding efforts in Canterbury, a generally solid construction market and strong net immigration are expected to augment domestic demand in 2015. These reliable sources will provide a solid platform for growth this year. At the same time, the economy is dealing very efficiently with high levels of growth. In other words, it can sustain a high growth rate without booming inflation, which in turn gives the RBNZ more room to keep monetary policy at a more accommodation level for longer.

The differing economic conditions and tolerances between Australia and NZ are expected to widen the interest-rate gap between the two nations. In Australia, the threat of a strong housing market is always going to be in the back of the RBA’s mind, but it can use macro-prudential tools to limit price pressures in the housing market. This will free up the RBA to use traditional monetary policy to support the broader economy. As such, we expect the R.B.A will cut the official cash rate next year. We believe that the R.B.A may hike rates twice next year, which would bring the cash rate to 2.00% by the end of 2015.Across the Tasman, the R.B.N.Z is expected to begin tightening monetary policy next year, but not until Q3 or Q4. Easing price pressures in the housing market and only mild inflationary forces in the rest of the economy, largely due to falling commodity prices, mean that the RBNZ can maintain looser monetary policy for longer than would be possible if inflationary pressures were stronger. We see the RBNZ raising the cash rate to 3.75% late in the third quarter or early in Q4 2015.