The Relationship Across The Ditch: Economic rises and falls between Australia and New Zealand

Aussies and Kiwis have been trading citizens and currencies for decades. In this three-part series entitled The Relationship Across The  Ditch, we’ll explore some of the many things which contribute to the uniqueness of the relationship. 

Over the years, there have been a number of trends of the trade that have a substantial impact on the currency, housing prices and employment prospects. We’re going to take you through the most significant of these trends and give you some idea as to what we think will happen in the near future.

“The Brain Drain”

A brain drain occurs when a country’s brightest, most qualified workers begin to emigrate in large numbers. This is often because people are searching for bigger opportunities than they can find locally. This hit New Zealand hard in the late 1980’s. Since then, a net figure of 500,000 people have moved from New Zealand to Australia in search of wages as much as 30% higher. New Zealand’s Prime Minister in the early 80’s, Robert Muldoon, famously said that “New Zealanders who leave for Australia raise the IQ of both countries”. Nonetheless Muldoon wasn’t exactly known for being right, nor his economic successes.

Due to its rich deposits of precious metals Australia has had a huge draw for miners, though this has fallen in the wake of China’s economic slowdown in recent years. Furthermore, the rebuild of Christchurch after the recent earthquakes has heavily increased New Zealand’s demand in the construction and industrial sectors. Net migration to Australia currently sits at just under 800 people as of 2015 (New Zealand Statistics here). Demand for commodities and mining may begin to pick up in the future again, as developing economies such as India and South East Asia begin to pick up the slack left by China. This may reverse the current trend, as workers often follow the higher wages.

It may also be worth noting that net migration inflows can increase the demand for domestic housing. This is something we’ve seen quite strongly in Auckland in recent years. Housing demand is still strong in Australia, particularly in the more popular metropolitan areas like Sydney – where financial services are booming – which employs around 450,000 people in the financial services sector alone.

Currency Movements

As of writing, the AUD/NZD sits at approximately 1.03, having more or less hit parity (AUD/NZD = 1) in late 2015. This is a far cry from around 1.25, where the rate sat in around 2011 and around 1.42 in the mid 1980’s when the NZD began to float again (Muldoon had it fixed before that). Part of this has been due to strong developments in New Zealand’s economy, relative to Australia. In particular, New Zealand’s Reserve Bank has maintained high interest rates – partly to put the brakes on the housing market, though they are beginning to slowly cut them.

A low AUD/NZD has a number of tradeoffs. While this makes New Zealand’s imports cheaper, including those from Australia, it makes New Zealand’s exports more expensive. In particular, milk and dairy farmers have become a struggling $11bn industry.

Historically, such a low AUD/NZD has been unsustainable and dangerous for New Zealand’s economy. While this may indicate that the trend won’t continue, it’s tough to say. Currency trends are generally unpredictable, despite what experts may say.

Agreements – Tax, trade, immigration

New Zealand and Australia have been part of the Closer Economic Relations (CER) agreement since 1983. This has unified the two markets into one Single Economic Market (SEM) – meaning that there are no tariffs or restrictions. This opens up trade between the two countries and ensures that both countries can trade based on what they specialise in.

New Zealand and Australia also have close ties in the area of tax, thanks to a Double Taxation Agreement (DTA) between the two countries. This introduces special rules that stop Kiwis and Aussies having to pay tax twice on income earned in the other country. So if you live in Australia with income from New Zealand investments, you often don’t get taxed by both countries.

This ensures that we can conduct business as usual between the two countries without having to worry about a lack of co-operation from the government.

New Zealand and Australia also have the Trans-Tasman Travel Arrangement. This arrangement has allowed New Zealander and Australians to visit, live and work in either country, without the need to apply for authority to enter the other country before travelling. Recent developments in this agreement have made it somewhat easier for those New Zealanders who have worked in Australia for five years or more to access Australian citizenship.

Even though living and working in Australia is easy under regulatory laws, it’s still one of the hardest things for a Kiwi to gain citizenship in Australia, especially when considering the amount of other nationalities who are granted citizenship on a daily basis! As of 2001, during John Howard’s term as Prime Minister of Australia, New Zealanders were no longer able to qualify for welfare benefits in Australia unless they became permanent residents.

The relationship between Aussies and Kiwis will always be a friendly rivalry, but things are looking positive for our future economic relationship. While highs and lows are always going to happen, both countries look forward to a strong partnership in years to come. Be sure to keep a lookout and check in regularly to The OrbitRemit Blog for our next part in the series of the relationship across the ditch.