In the sweet spot of the global economy

Published in Insights, The New Zealand Initiative’s newsletter, 21 February 2014

On Tuesday, I spoke at a conference organised by our sponsor, PortfolioConstruction Forum. The audience were mainly Australian and New Zealand investment advisors and wealth managers and my topic was the state of their respective economies.

The Kiwis hardly needed cheering up from me. New Zealand is performing so strongly that some analysts have started referring to us as the “rock star” of the world economy. For the Australians, it was a different story. Not only is their mining boom levelling out, they also find themselves outperformed by us, which probably hurts even more.

However, in my view there are enough reasons for optimism on both sides of the Tasman. Both Australia and New Zealand are ideally placed to benefit from the changes in the world economy.

The mega story of the 21st century is the rise of the Asian middle class. Over the next 25 years, the global middle class will grow by about 2 billion people. This rise is almost entirely driven by Asian countries and it will drive demand for Australian and New Zealand exports.

The Australians noticed this surging demand earlier than New Zealand because their primary exports are coal, iron ore and other minerals – hard commodities that are required early on in the process of industrialisation. New Zealand’s soft commodities from our agricultural sector are in greater demand as Asia’s economies shift their focus from investment to consumption. This shift is also evident in a slight dip in Australia’s terms-of-trade while New Zealand is currently seeing terms-of-trade at a 40-year high.

Both Australia and New Zealand will continue to enjoy prices for their exports that are much above their historical averages. Entering free trade agreements with Asian countries will further boost export income, as did the free trade agreement New Zealand signed with China in 2008. It has since more than quadrupled our exports to China as a percentage of GDP.

We are also well placed to take part in Asia’s boom for structural and domestic reasons. No matter which factors you measure – economic freedom, freedom from corruption, economic competitiveness – Australia and New Zealand typically appear in the global top 20.

With our sound institutions and our growing integration into the Asia-Pacific economic region, if any countries are able to grow, they are New Zealand and Australia.

However, there is one thing we are lacking, and that is self-awareness. We often forget how lucky we are. And we sometimes forget that even the best conditions should never make us complacent but encourage us to become better still.

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