Economic analysis

The New Zealand economy appears to be on somewhat more solid footing than Australia’s. At 1.1 percent, Q2 growth was stronger than consensus expectations. The widening current account deficit appears to reflect robust domestic demand. Building approvals, while still below last year’s levels, rose 6.8 percent in August to a five-month high.

The Australian economy is more fragile. Housing and consumer spending, previously important growth engines, are slowing, without new leadership emerging. Some hoped exports would assume the mantle, but these fell about 3 percent in August to a five-month low. Commodity exports, which account for about 10 percent of Australia’s GDP, have weakened, especially foodstuffs and fibers. For example, the export of wheat and other cereals are off 38 percent year-over-year and world exports have fallen by 14 percent in the July-August period.

Unlike New Zealand, Australia also recorded a decline in imports, suggesting domestic demand is soft. Some measures of consumer confidence stand at two-year lows despite a fairly tight labor market. Unemployment in Australia stands at 5 percent, down from 5.7 percent a year ago. Rising gasoline prices and a softer housing market appear to have taken their toll.

Profit-taking on commodity and energy companies, fears the U.S. economy may be slowing, and a sell-off in global equity markets triggered a sharp sell-off in Australian stocks recently. The S&P/ASX 200 Index dropped 4.3 percent on Oct. 5 and 6, the largest two-day decline since September 2001, when the terrorist attack on New York City triggered a 4.7-percent decline. The sell-off has come from lofty levels as the index made its record high on Sept. 29.

Australia’s GDP is about $400 billion, while New Zealand’s is around $59 billion. Australia is New Zealand’s largest trading partner, absorbing about a fifth of its exports and accounting for about a quarter of its imports. Given the size considerations and economic integration of New Zealand with Australia, many equity investors take a combined view of their currencies, although playing the Aussie/Kiwi cross is common in the foreign exchange market.

There is an exchange traded fund for Australian stocks — the MSCI Australian index (EWA). Even with the sharp decline in Australian shares in recent days, it is still up more than 10 percent on the year and about 41 percent year-over-year.

A popular way to play Australia’s commodity exposure is through BHP (symbol BHP), the world’s largest mining company. It trades as an ADR and is up about 31.5 percent year-to-date and up almost 48 percent year-over-year. Another Australian company, Rinker (RIN), has attracted much interest as a way to get some Australian market exposure as well as play the U.S. construction sector (housing and reconstruction). Rinker is the biggest supplier of cement blocks in the U.S. It is up about 88 percent over last year and about 43 percent year-to-date.