Last month, New Zealand celebrated emphatic victories over Australia in the Bledisloe Cup. For many years, sporting competitions like this were the only opportunity for Kiwis to beat their cousins across the Tasman.
But according to the World Economic Forum’s Global Competitiveness Report, published yesterday, it’s not just the All Blacks that may now have the edge over the Wallabies. The New Zealand economy may soon be outcompeting Australia’s.
For the first time in the history of the WEF’s competitiveness index, New Zealand is ranked higher than Australia. For the first time, Australia is no longer a top 20 economy globally. Out of 144 countries surveyed, New Zealand now ranks 18th (up from 23rd last year). Australia, on the other hand, dropped one rank from 20th to 21st place. Ouch.
To declare an interest and as a disclaimer, The New Zealand Initiative and our colleagues at Business NZ were the WEF’s local partner institutes for the report. The report included in-depth surveys of the country’s business leaders, many of whom are members of our organisation. The New Zealand Initiative is a think tank supported by the chief executives of New Zealand’s largest companies.
In a way, the results of the Global Competitiveness Report do not come as a complete surprise to us. Many of our New Zealand members have extensive business relations across the Tasman and are intimately connected to the Australian economy. It has been palpable in recent months how their perceptions of the two economies have changed. While they have become more and more buoyant about New Zealand’s domestic prospects, their assessment of the Australian economy has gradually deteriorated.
The competitiveness index bears this out. Ironically, perhaps, Australia does not get criticised for the issues that mainly excite the Australian domestic debate. Thus on macroeconomics, the WEF remains fairly sanguine about Australia’s circumstances: “Australia’s favourable macroeconomic situation is improving further. Its budget deficit was reduced in 2012 and inflation brought to under 2 per cent, while the public debt-to-GDP ratio, though on the rise, is the third lowest among advanced economies, behind only Estonia and Luxembourg.”
Personally, I would not be quite as upbeat on Australia’s public finances. Though public debt as a percentage of GDP may still be low by international standards, the deficits of the past years have put Australia on a dangerous path. Once debt financing is accepted as a way of funding public policy, it is hard to find a political consensus to return to balanced budgets, let alone budgets in surplus.
However, the real challenges for Australia are in the field of microeconomic policy, as the WEF report points out: “The main area of concern for Australia is the rigidity of its labour market (54th, down 12), where the situation has deteriorated further. Australia ranks 137th for the rigidity of the hiring and firing practices and 135th for the rigidity of wage setting. The quality of Australia’s public institutions is excellent except when it comes to the burden of government regulation, where the country ranks a poor 128th. Indeed, the business community cites labour regulations and bureaucratic red tape as being, respectively, the first and second most problematic factor for doing business in their country.”
The survey of Australian business leaders, conducted by the Australian Industry Group, revealed that the most problematic factors for doing business in Australia are restrictive labour regulations, inefficient government bureaucracy, tax rates and tax regulations.
New Zealand, on the other hand, shows an altogether more promising picture. The greatest objective difficulties are macroeconomic circumstances and, unsurprisingly, market size. However, the country scores high for the quality of its institutions, its education and health systems, its goods and labour market efficiency as well as the development of its financial markets. The areas in which kiwi business leaders see the greatest need for improvement are infrastructure, the education of the workforce and the country’s capacity to innovate.
Again, I would take issue with the WEF’s macroeconomic assessment. On New Zealand, it seems too pessimistic to me.
There are some obvious macroeconomic dangers for the New Zealand economy, in particular an overheating property market. On the other hand, fiscal policy has been going in the right direction for the past five years. The current government has maintained spending discipline in the most adverse circumstances.
When Bill English became Minister of Finance in 2008, he not only had to confront the repercussions of the global financial crisis, but also inherited an economy in recession, a collapsed non-bank finance sector and the prospect of deficits for years to come. To make matters worse, two earthquakes destroyed the CBD of the country’s second largest city, Christchurch.
Despite this, the New Zealand government remained committed to returning the budget to surplus while trying to provide some stimulus through income tax cuts. The strategy worked: The New Zealand budget will be in surplus from next year and growth is steady.
This macroeconomic outlook directly translates into the economic mood. According to the ANZ Business Outlook survey, a net 48.1 percent of New Zealand firms expect general business conditions to improve in the year ahead, down from a 14-year high of 52.8 percent in July. In contrast, last month’s National Australia Bank’s survey of Australian business confidence fell to its lowest level since November 2012.
Just this week, Newport Consulting revealed that almost 60 per cent of Australian business leaders believe that Canberra is working against them. Only 13 per cent of New Zealand business leaders said the same about their own government in Wellington.
The same survey also showed that a vast majority of Australian executives experienced a slow-down in the Australian economy, whereas only 37 per cent of New Zealand corporate leaders said the same about their own economy.
Australia and New Zealand: They have been going in different directions for the past five or six years. It will be interesting to see in which direction Australia opts to go on Saturday, and where Australia will be in next year’s competitiveness index. And, of course, whether the Wallabies will stand a chance against the All Blacks at the final test of the year in Dunedin.