Can Australia fly on Kiwi wings?

New Zealand is set to be one of the strongest performing economies in 2014, largely as a result of China’s growing taste for dairy. Australia’s export and tourism industries could see a welcome boost as a result.

There are plenty of concerns for Australian businesses right now but for our neighbours in New Zealand confidence is riding high: business confidence climbed to a 20-year high in the December quarter. It points to a big 2014 for the New Zealand economy.

The New Zealand Institute of Economic Research (NZIER) released its quarterly survey on business sentiment today, with the headline measure showing that business confidence rose to its highest level since June 1994 in the December quarter.

Respondents reported that labour hiring rose to its highest level in seven years, with firms expecting to expand further in 2014. This points to increased pressure on wages as it becomes harder to find new staff.

The New Zealand economy has been a quiet achiever during 2013. Real GDP growth rose to 3.1 per cent in the September quarter and is likely to push to between 3.2 and 3.5 per cent in 2014. Suddenly growth in New Zealand is among the strongest of all the developed countries and set to be much stronger than the Australian economy this year.

Growth is being partially driven by the rebuilding of the earthquake damaged Christchurch; construction that citizens wish not be needed but has nevertheless provided a boon for the construction industry.

Budget estimates suggest that the costs of rebuilding Christchurch will be around NZ$40 billion. Obviously this will be a temporary growth driver but there is mounting evidence that growth has spread beyond the Christchurch and Canterbury region.

Increasingly growth in New Zealand is coming from exposure to China, who is now New Zealand’s biggest market for exports. Prices for New Zealand’s biggest export, dairy products, rose sharply due to increased demand from the Chinese.

Although the Chinese economy may slow over the next few years, dairy prices should remain at an elevated level, with demand rising at a faster pace than exporters can increase their supply capacities. New Zealand is perfectly placed to be swept up in that boom.

The demand from China should push the New Zealand dollar higher, with some analysts predicting that it could hit parity with the Australian dollar for the first time in 40 years. It is a big change from a currency that has typically been worth between AU$0.77 and AU$0.83 for the past five years.

Although parity would be deeply shameful for Australians, it should lead to an influx of New Zealand short-term visitors and provide some relief for our tourist hotspots – in addition to a range of other export benefits.

It is not all rosy for the Kiwis, as mentioned above, growth is being partially driven by the rebuilding of Christchurch and the living standards of many in that region have declined dramatically. So far most of the benefits are accruing to businesses and the wealthy, with little finding its way to the working class. There is a human misery component that can never be captured by GDP.

The New Zealand government has remained steadfast in its desire to head back to surplus and reduce government debt but this should not come at the expense of vital services, particularly for those most affected by the Christchurch disaster. It isn’t only construction costs that rose from the earthquake and the government needs to remember that.

We are experiencing a bit of a role reversal for the Australian and New Zealand economies. For so long it was Australia, riding its once in a lifetime commodity boom, that enjoyed the benefits of Chinese growth but now New Zealand has set itself up nicely to get its share of the spoils.

The New Zealand economy is set to be one of the strongest in the developed world this year and will perform more strongly than the Australian economy. This should, however, provide a timely boost to the Australian export and tourism industries, particularly if the New Zealand dollar appreciates as much as some expect.