Bollard: NZ and Australia will recover differently

Reserve Bank Governor Alan Bollard hit out yesterday at the foreign exchange market's apparent inability to tell the difference between New Zealand's short-term prospects and Australia's much brighter ones.

Speaking to a business audience in Auckland, Bollard said both countries had survived the financial crisis well, but their immediate prospects were different.

"Australia has avoided negative growth, and its prospects are driven by strong terms of trade, vast mineral deposits, the Chinese market, and rapid population growth.

"New Zealand has had a recession, and the pick-up is slower and more vulnerable - a difference financial markets do not appear to appreciate," he said.

That was particularly evident in the relatively stable transtasman cross-rate on foreign exchange markets.

Australia was entering a new minerals boom and investing heavily, encouraged by new finds, reopening markets, bottlenecks and strong prices. "This all means an economy that looks less like New Zealand."

New Zealand's terms of trade, which reflect relative prices of the kinds of things we export against those that we import, are back where they were four years ago, while Australia's are around 25 per cent higher.

Non-commodity exports make up a significantly higher proportion of New Zealand's exports than Australia's.

But that also meant Australia's strong growth outlook - estimated to be almost half as high again as the OECD average until 2017 - raised the prospects for New Zealand exporters of manufactured goods and services.

Australia would be a very strong growth market, and could help New Zealand to indirectly benefit from East Asian growth, he said.

"Less inflation pressure here will help our competitiveness, assisted by relative exchange rate stability and the spreading Single Economic Market," Bollard said.

"Australia is a lucky country but we could be a lucky neighbour. We talk about catching up with Australian incomes, but we have better chances of taking advantage of their growth."