Australian June GDP and interest rates: What does it mean for NZ?

The RBA lowered the official cash rate to 7% yesterday, while GDP growth was a measly 0.3% over the June quarter. It appears likely that the RBA will cut rates again in October and further cuts following that cannot be ruled out.

Given that this is the case I am not going to comment on the fact that the majority of economists in Australia appear to be painfully dovish (excluding the insightful commentary from Dr Stephen Kirchner of course). I am instead interested in how falling Australian interest rates, and weakening Australian growth (assuming that it says weak over the coming couple of quarters) impacts on the NZ economy.

Lower interest rates in Australia will directly lower demand for Aus dollars, as our dollar likes to hang out with the Aussie dollar, this is likely to dampen demand for NZ dollars as well – weakening our currency. Think of it this way: We are a small economy that people don’t know much about, however people assume that as we are next to Aussie we must be moving in a similar way – as a result, changes in the Aussie economy and interest rates give people (perceived) information about the NZ economy (specifically given that both currencies are strongly related to movements in commodity prices).

On the straight economic growth terms, a slowing domestic Australian economy is no good for us. Looking at the latest merchandise trade figures (July) we are told that over the last 12 months, exports to Australia accounted for 23% of total exports – much larger than the second biggest destination (USA at 10%). Although this figure has become inflated with “intermediate goods” (crude oil to refineries in Australia) it still indicates that a slowdown in Aussie could hit our exports hard.

Overall, we need to keep an eye on our big neighbour to the east – big new over there will probably be big news over here as well.