I have an xml feed supplied by one system which is used by another system and both of them (at the moment at least) are located on the same physical server.
In this case would using gzip to encode (large) xml responses slow things down or speed it up, or maybe wont make any difference.
How are you sending the data between them? But regardless, if there is no bandwidth limit, there is probably little point in zipping them up. If you plan to decentralise them later, though, then it can't hurt that much, to leave it in, until such time as you move them to separate machines.
I wouldn't do if it they were always going to live together though (depending on the medium you're using).
As always, you would have to profile your own usage case.
In general the data transfer rate between machines is a very slow link in any processing chain, so I'd say gzipping should speed things up a little. The compression and decompression operations are efficient, and give significant filesize reductions for text.