Inflation has fallen in Australia and NZ, but which is faring better?

By Gareth Hutchens, ABC News

New Zealand's economy is in recession. It has 32,000 fewer employed people than a year ago, and thousands of Kiwis have been heading to Australia to escape their dreary economy.

Australia's economy is not in recession. Its labour force has never been bigger, and it has a record number of people employed, with far more job vacancies than existed a few years ago.

But inflation has fallen in both countries, and Australia's Reserve Bank is expected to start cutting interest rates soon.

What's going on? Let's tell the story with a few graphs.

Interest rates in NZ and Australia

In recent years, New Zealand and Australia have both experienced high inflation.

The Reserve Bank of New Zealand (RBNZ) began lifting interest rates in October 2021 to combat it, eight months before the Reserve Bank of Australia (RBA) did so.

It also lifted rates higher. Its official interest rate peaked at 5.5 percent, whereas Australia's peaked at 4.35 percent.

And after lifting rates earlier, and higher, the RBNZ has already started cutting rates again. Its first cuts were delivered in August.

When will Australia finally cut rates? According to financial markets, there's a high chance the RBA board will cut rates in a couple of weeks when it meets on 17-18 February (we'll have to wait and see).

Unemployment rates have risen

What's happened to unemployment in both countries?

To combat their inflation, the RBNZ and RBA hiked rates to slow economic activity, and they did so knowing that unemployment would rise as a consequence. They wanted unemployment to rise to reduce wage and inflation pressures.

However, the actual employment outcomes have been very different in both countries.

Of course, we need to be careful when comparing unemployment rates in different countries.

Why? Because an "unemployment rate" can obscure important information about the true state of a country's labour force.

For example, New Zealand's labour force hasn't grown in the past 12 months, but you wouldn't know that by looking at its unemployment rate.

Thousands of Kiwis have left their country for Australia, and others have become disenchanted by the job search and given up looking for work. If those people had stayed in NZ, and were counted among the unemployed, NZ's unemployment rate would be much higher.

It's a very different story in Australia.

Australia's labour force has been consistently growing for 12 months. It's now the largest it's ever been. Australia has never had so many people with jobs. Our participation rate and employment-to-population ratio are both at record highs.

Therefore, you could argue that New Zealand's unemployment rate is obscuring important negative information about the country's economy right now, while Australia's is doing the opposite.

But when you compare those graphs above, you can still get a sense of the very different strategies our countries' central banks have been pursuing to kill inflation.

Inflation in NZ and Australia

What's happened to inflation in both countries?

It's worth remembering that Australia's inflation target is a little higher than New Zealand's.

The RBNZ tries to keep inflation within a range of 1 and 3 percent over the medium term (with a focus on the 2 percent midpoint), whereas the RBA wants to keep inflation within a range of 2 and 3 percent over the medium term (with a focus on the 2.5 percent midpoint).

The graph below shows headline consumer price inflation in both countries.

And the next graph shows the central banks' preferred measures of underlying "core" inflation.

New Zealand's economy is in recession

And finally, what's happened to economic growth in both countries?

The graph below shows quarterly growth rates for the past 12 quarters (with the most recent being the September quarter of 2024).

In the past three years, Australia's economy hasn't recorded a single quarter of negative growth.

But New Zealand has recorded three-quarters of zero growth and three-quarters of negative growth, and it's currently in recession (it's just experienced six consecutive months of negative growth).

Interest rates alone haven't caused those outcomes.

The structure of Australia's economy is very different to New Zealand's. It relies on different export markets. Different forces have been at play in both economies in recent years.

Australia's population (27.5 million) is also more than five times New Zealand's (5.3 million), and its labour force (15.2 million) is five times larger (3 million).

But the RBA has deliberately pursued a different inflation-fighting strategy to New Zealand's central bank, by putting more emphasis on employment.

"The [RBA] board's strategy over recent years has been to set monetary policy in a way that returns inflation sustainably to target in a reasonable time-frame, alongside a gradual easing in labour market conditions to levels consistent with sustainable full employment," RBA governor Michele Bullock said in November.

"The goal underpinning this strategy has been to preserve as many of the jobs that have been created over recent years as we can," she said.

And thousands of Kiwis have revealed which strategy they prefer, by buying a plane ticket to Australia.

- ABC News