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New Zealand Business Forecast Report Q2 2014

  • March 2014
  • -
  • Business Monitor International
  • -
  • 48 pages

Core Views

Indicators suggest that the performance of the New Zealand economy remains on a stable trend. However, the combination of uncertainties stemming from a slowdown in the Australian economy as well as a potential for policy vacuum to occur as parliamentary elections draw nearer in November lead us to maintain that growth is likely to moderate in 2014 to 2.7% versus an estimated 3.5% for 2013. We believe that the Reserve Bank of New Zealand (RBNZ) will hike its policy rate once by 25 basis points at the end of Q114, and subsequently hold its rates at 2.75% for the rest of the year. We believe the rate hike will be largely pre-emptive in nature, in response to cool domestic price pressures that have been on the rise.

That said, the subdued, though growing, growth contribution from business credit suggests to us that the central bank will avoid hiking interest rates further, and instead re-focus on cooling the housing market through its macro-prudential rules. Indeed, we note growing signs that the macro-prudential rules are beginning to have their intended effect on housing market. Volatile weather and a trend of increasing compliance/regulations will continue to pose risks to New Zealand exports, given the changing composition of its trade with the external world. While dairy exports have surged of late, we believe this is unsustainable, driven mainly by Chinese importers fearing a possible lack of supply as new regulations are set to be implemented in March. Taking a longer term view of things, we believe that the trade balance will record a surplus and continue to head in the right direction as the interest rate hike by the RBNZ to help rein in import consumption, and reduce external liabilities in the banking sector as housing-related lending cools the banking sectors.

This will help narrow the current account deficit over the coming years will allow the country to gradually pay back its huge external liabilities and reduce its vulnerability to external shocks. The National Party remains determined on achieving its goal of returning the fiscal budget to surplus in fiscal year 2014/15. While the issues of housing affordability, drought assistance for farmers and controversial decisions on the country’s pull-out from the second commitment period of the Kyoto Protocol remain contentious topics that could affect the ruling party’s popularity as it approaches parliamentary elections in 2014.

Moreover, rising popularity of the opposition Labour Party suggests that the government will be increasingly pressured to lean towards a more populist platform. That said, we do not see any immediate threat to its ability to formulate policy. We maintain our short-term political risk rating at 84.0 (out of 100), and expect the issue of affordable housing to be one of the key issues in the 2014 elections.

Major Forecast Changes

The strong production and new orders indices for the manufacturing and services sectors suggest that the New Zealand economy is likely to enjoy relatively strong growth over the next few months. As such, we have raised our 2014 real GDP forecast to 2.7% from 2.3%, but maintained a conservative stance given the growing probability of adverse impact on the domestic economy in the event of a decline in external demand for New Zealand assets.

Key Risks To Outlook

A global recession, brought about by a recession in the US and, increasingly, China. This would hit the price of New Zealand’s export commodities and corporate profits.
A banking crisis in Australia, which would likely spread to New Zealand given the external borrowing of local banks, could cause extreme stress to the financial system as liquidity and credit dry up. While not our core view, this could accelerate the debt deflation spiral in the country.
A strong New Zealand dollar, supported by demand for ‘safe’ assets as uncertainty surrounding the eurozone continues, could cause the country to accumulate even greater external imbalances. The rising demand for New Zealand assets is likely to affect have an upside impact on house prices. But ultimately, we maintain that the economy has to eventually head back on the path of deleveraging and redistributing resources to productive sectors in the economy. Volatile weather conditions, such as the extreme dry conditions in key farming regions in the north, could adversely impact export volumes and farmers’ profitability. This could affect export performance, and poses downside risks to our overall growth forecast.

Table Of Contents

New Zealand Business Forecast Report Q2 2014
Executive Summary 5
Core Views 5
Major Forecast Changes 5
Key Risks To Outlook 5
Chapter 1: Political Outlook 7
SWOT Analysis 7
BMI Political Risk Ratings 7
Domestic Politics 8
Numerous Caveats In Residential Solar Scheme 8
We believe that the residential solar loan programme proposed by New Zealand's Green Party could potentially be feasible, depending
on the precise terms of the scheme. We highlight that such a scheme would have to be cost-neutral and not require any subsidies, as
the government is unlikely to provide subsidies for the scheme based on its fiscal account.
Long-Term Political Outlook 10
Stability To Prevail, But Not Without Challenges 10
New Zealand is likely to remain one of the most stable states in the world over the coming decade. The government's main challenges
are to rein in the budget deficit, improve the business environment to attract greater foreign investment and raise opportunities for the
indigenous Maori population. In the realm of foreign policy, New Zealand is likely to continue relying on Australia as its guardian. A key
wild card is whether New Zealand deepens political ties with its neighbour, possibly in the form of a confederation.
Chapter 2: Economic Outlook 13
SWOT Analysis 13
BMI Economic Risk Ratings 13
Economic Activity 14
Economic Growth To Moderate Despite Strong Start To 2014 14
We believe that real GDP in New Zealand will moderate to 2.7% in 2014 from a projected 3.5% in 2013, as we expect growth in private
consumption to be restrained while businesses remain cautious due to external and domestic factors.
Fiscal Policy 16
Further Fiscal Improvements Harder To Come By 16
While the New Zealand government has made significant improvements to narrowing the fiscal deficit, we believe that further fiscal
consolidation may be difficult to achieve. We expect improvements to continue at a slower pace, given that persistent vulnerabilities
in the economy could lead to greater revenue disappointment while growing election pressures suggest that fiscal spending could
table: Government Asset Sales (2012-2014) - Estimates And Actual Returns 16
Monetary Policy 18
Rate Hike Pressures To Fade After Q114 18
The Reserve Bank of New Zealand (RBNZ) held its policy rate at 2.50% in its monetary policy meeting on January 30. However, the
recent acceleration in the prices of non-tradable goods and services, which grew by 2.9% y-o-y, has led us to believe that the central
bank will hike its policy rate by 25 basis points (bps) at its next meeting in March.
Balance of Payments 19
Dairy Export Spike Unlikely To Persist Beyond Q114 19
Although there has been significant increase in New Zealand milk powder exports over the past four months since October, we do not
expect this performance to be sustained beyond Q114 given that we believe the surge in demand has been driven by importers frontloading
imports, before new regulations are implemented. We expect exports to normalise in H214, and maintain that the widening milk
deficit in China should support New Zealand's export growth. Together with our expectations for an interest rate hike in H114 to help
temper import growth, we believe the country remains on track to record a trade surplus in 2014.
Chapter 3: 10-Year Forecast 23
The New Zealand Economy To 2023 23
Deleveraging Will Weigh On Growth 23
The main factors that contributed to New Zealand's solid real GDP growth outturn over the past decade will not be in play to the same
degree over the next 10 years. Population growth will slow, terms of trade support will be hard to come by, and we expect New
Zealand households will eventually experience protracted deleveraging cycle. These factors should see real GDP growth average
2.4% over the 2015-2023 period, below the 3.6% growth rate seen over the 1999-2007 boom years.
table: Long -Term Macro economi c For ecasts 23
Chapter 4: Business Environment 25
SWOT Analysis 25
BMI Business Environment Risk Ratings 25
Business Environment Outlook 26
Institutions 26
Table: BMI Business and Operation Risk Ratings 26
Infrastructure 27
Table: BMI Legal Framework Rating 27
Table: Labour Force Quality 28
Market Orientation 29
Table: Trade And Investment Ratings 29
Operational Risk 31
Tourism 33
Chapter 5: Key Sectors 33
Tourism 33
table: New Zealand Inbound Tourism, 2011-2018 34
table: Outbound Tourism, 2011-2018 35
Agribusiness 37
table: Milk Production and Consumption, 2013-2018 37
table: Butter Production and Consumption, 2013-2018 38
tab le: Cheese Production and Consumption , 2013-2018 39
tab le: Who le Milk Powd er Production and Consumption , 2013-2018 40
table: Beef and Veal Production and Consumption, 2013-2018 41
table: Poultry Production and Consumption, 2013-2018 42
Other Key Sectors 45
tab le: Pharma Sector Key Indicators 45
table: Infrastructure Sector Key Indicators 45
Chapter 6: BMI Global Assumptions 47
Global Outlook 47
Global Growth Optimism Turning To Disappointment 47
Table: Global Assumptions 47
Tab le: Develop ed Stat es, Real GDP Growt H, % 48
Tab le: Em erging Mar kets , Real GDP Growth , % 49

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