NZ bolts ahead of Australia in economic recovery

The Reserve Bank of NZ has a good reason to skite – for the first time in decades, the country is skipping ahead of Australia.

Outgoing RBNZ deputy governor Geoff Bascand: ‘In the end prudence pays off.’ Picture: Britta Campion / The Australian

On the eve of his retirement next January, Reserve Bank of New Zealand deputy governor Geoff Bascand is still playing by the rules, declining to engage this week in the most subtle form of one-upmanship against the RBNZ’s peer institution, our Reserve Bank.

It would have been poor form in the central bankers’ club, even on the way out.

The fact is, however, that Bascand and his boss, RBNZ governor Adrian Orr, have good reason to skite – NZ, for the first time in decades, is skipping out of a severe economic downdraft comfortably ahead of Australia.

In the 1990s recession and the 2008 global financial crisis, the roles were emphatically reversed.

NZ suffered deep economic scarring as a result, convincing Orr and Bascand, the governor’s head of operations, to play their part in a mission to inject some spine into the economy and make it more resilient in a 1-in-200-year seismic event.

In effect, they would “Australianise” it. And guess what? So far, it’s worked.

Both Australia and NZ had the rare honour among developed economies of ending the June 2021 quarter in better shape than the December 2019 quarter.

On ANZ numbers, real GDP for Australia in the June 2021 quarter was 1.7 per cent higher than our final Covid-free quarter 18 months before.

It’s not a bad performance, but we’ve been eclipsed by NZ’s 5.3 per cent economic expansion over the same period.

Economists are fond of adding the phrase “all other things being equal” when they want to focus on a single data point in a multi-layered and complex discussion.

But there’s no getting rid of complexity when the subject matter is comparative economic performance.

ANZ head of FX strategy Daniel Breen says more sustained lockdowns in Australia have played as big a part in NZ’s stronger recovery as any other factor.

Bascand, for his part, emphasises the importance of policy levers flexed by the RBNZ, without breaching central-banker club rules and bringing the RBA into the debate.

“I think we have to take some comfort that we’ve ridden through this one well, and a good part of the reason is that we had room for a big fiscal response and we took that opportunity – our fiscal response was bigger than the one in Australia – and we were surprised by its effectiveness,” he tells The Weekend Australian.

“Fiscal policies usually take some time to work but the wage subsidies got into businesses’ hands and through to employees very quickly.

“Debt went up 20 percentage points of GDP but it was from a very low level, so in the end prudence pays off.

“I’m sorry for being a boring central banker, but I’d say this is evidence in our favour.”

The deputy governor agrees that the pandemic has been an extraordinary shock – a “real doozy” – not only for NZ but for the rest of the world. Just as importantly for NZ, it has become the “crash that never happened”, in stark contrast to previous downturns.

Economic shocks are generally transmitted to balance sheets through four channels – interactions with asset markets, defaults and insolvency risks, deleveraging by households and businesses, and credit rationing by financial institutions.

NZ had a severe recession in the early 1990s, with unemployment spiking to 11 per cent.

Like the RBA and other central banks, the RBNZ believed this was the likely template for the pandemic, but it never happened.

NZ Prime Minister Jacinda Ardern visits the Pasifika Youth Vax Festival at Cannons Creek Cage in Porirua on a 'Super Saturday' vaccination drive. Picture: Getty

Bascand’s core thesis is that robust balance sheets – not just the sovereign but households, businesses and financial institutions as well – yield much faster economic recoveries.

“The interconnected nature of those sectors is very important,” he says.

“Strong public and private sector balance sheets going into the pandemic meant we avoided a negative spiral, and in fact managed a positive cycle of recovery.”

The feedback loop was balance-sheet strength buttressing the financial system, enabling credit growth to respond swiftly and helping monetary policy to get to work to achieve its price stability and employment objectives.

The downside has been lockdowns periodically forcing businesses into hibernation, with border closures all but stopping immigration and supply chain disruptions pushing up costs. Sure, the level of output in NZ slumped by 10 per cent in the second quarter of 2020, but unemployment rose only modestly and then fell much faster than expected in the second half of the year and the first half of 2021. Surprisingly, house prices jumped and, according to Bascand, non-performing loan ratios seem to have ignored Covid altogether.

While the RBNZ might have played only an indirect role in some of the policy prescriptions, it can certainly take credit for its capital reforms of the mostly Australian-owned banking sector.

The central bank resisted a ferocious lobbying campaign by the majors, forcing the NZ subsidiaries to dramatically increase their tier one capital ratios and then withhold dividends that would otherwise have been upstreamed to their parents.

The implementation period might be seven years, but the average tier one ratio going into the pandemic was 13.5 per cent compared to 8.1 per cent a year before the 1990s recession and the GFC.

Asked if he’s surprised at the intensity of the sector’s lobbying, Bascand says the central bank was well aware it was asking a number of large institutions to “put a lot more money on the table”, with negative implications for their returns on equity.

“It was never going to be a case of: ‘Oh, that’s nice, let’s just take it (on the chin)’,” he says.

“The banks, I think, have moved on – in their heart of hearts they don’t agree with everything we do but they respect it and they’re acting on it.”

And so to the somewhat delicate comparisons with the RBA and the performance of the Australian economy.

Earlier this month, the RBNZ hiked the official cash rate by 25 basis points to 0.5 per cent.

The comparable rate in Australia is frozen at 0.1 per cent until at least 2024, according to governor Philip Lowe, which further supports the view that NZ is ahead of us in the recovery cycle.

Bascand approaches the question diplomatically.

“I don’t know that there’s much of a difference between the two,” he says.

“I mean, both economies were doing quite well until more recent restrictions, and your restrictions have gone on for quite a while.

“It’s a tough economic and health environment over there (in Australia) in more recent times.”

Lowe’s dovish monetary policy, which is designed to ignite some wages growth and push inflation back into the RBA’s 2-3 per cent target range, is attracting more criticism as time passes.

The RBNZ, however, is running its own race, believing that the re-emergence of inflation is not just a fleeting phenomenon.

“All central banks are making judgments about how persistent or enduring inflationary pressures might be, and the balance of supply and demand pressures,” Bascand says. “Certainly running into the period where we had this most recent lockdown, our economy was running very strongly and our labour market was very tight – we were pretty much at maximum sustainable employment.

“We were starting to see wages lift and we didn’t need to have so much support in place.”