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New Zealand Business Forecast Report Q3 2014

  • June 2014
  • -
  • Business Monitor International
  • -
  • 47 pages

Core Views

New Zealand's economic performance remains on a stable trend, with indicators showing that the manufacturing and services sectors remain firmly in expansion. We maintain that the pace of expansion will remain broadly the same as 2013, with just a slight acceleration to 2.7% in 2014, from 2.5% previously. While we had originally held the view that the Reserve Bank of New Zealand (RBNZ) will hold its official policy rate at 2.75%, intensifying price pressures and strong economic indicators have led us to
revise up our rate forecast to expect another 25 basis points. This would bring our forecast for the official cash rate to hit 3.00% by end-2014. Accordingly, we maintain that the next rate hike will be largely pre-emptive in nature, in response to cool domestic price pressures that have been on the rise.

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 and will allow the country to gradually pay back its huge external liabilities and reduce its vulnerability to external shocks.

While the government looks on track to record a budget surplus in fiscal year 2014/15, we maintain that debt reduction will remain sometime away as much of the surplus growth is dependent on highly optimistic forecasts in income and employment increases. We maintain that the National party will be re-elected to office, even though there may be changes to the constitution of the ruling coalition. Issues such as economic planning, 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. 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).

Major Forecast Changes

We have raised our interest rate forecasts for 2014, as the RBNZ has shown signs of adopting a more hawkish stance for the near term. As such, we see another 25 basis points worth of rate hikes, which will take the official cash rate to 3.00% by end-2014. Beyond this, we expect the central bank to maintain its macro-prudential rules, as there remain concerns about financial system stability given the high levels of household debt.

Table Of Contents

New Zealand Business Forecast Report Q3 2014
Executive Summary. 5
Core Views..5
Major Forecast Changes5
Key Risks To Outlook5
Chapter 1: Political Outlook. 7
SWOT Analysis.. 7
BMI Political Risk Ratings 7
Domestic Politics . 8
New Coalition Partners May Weaken National's Policy-Making Abilities..8
Recent opinion polls held in New Zealand suggest that the economy remains the primary concern for voters, which bodes well for the
ruling National party given their positive track record in managing the economy. That said, we note that the government's ability to form
policy could weaken as we see a growing possibility that the National party will need the support of other minority parties.
Long-Term Political Outlook 9
Stability To Prevail, But Not Without Challenges9
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
Moderate Growth Ahead..14
In 2014, we forecast the New Zealand economy to expand by 2.7%, only a slight acceleration from the 2.5% that was registered in
2013. While large construction projects such as the Canterbury rebuild will keep activity levels elevated, interest rate hikes from the
central bank are likely to weigh on debt-driven consumption. Together with softening milk prices and export volumes, we believe
income, job opportunities and overall growth will be capped.
table: Economic Activity..14
Fiscal Policy 16
Weaker Revenue Growth To Slow Fiscal Consolidation...16
Although the New Zealand government will continue to pursue fiscal consolidation, we believe that further fiscal surplus widening will
be constrained by a slower pace of revenue growth. Dependence on financial and non-financial instruments performance, together with
overly optimistic growth and employment forecasts, suggests the fiscal surplus will widen at a slower pace. 16
table: Fiscal Policy16
Monetary Policy... 17
RBNZ To Keep A Tight Rein On House Prices..17
Declining affordability ratios and hawkish policy measures from the Reserve Bank of New Zealand will likely cap growth in house
prices, supply-side constraints notwithstanding. We believe that stability concerns with regards to the property and banking sectors will
persuade the central bank to maintain its conservative stance.
table: Monetary Policy18
Balance Of Payments.. 19
NZD: Bearish Case Still Dominates Despite Rate Hikes19
With interest rate hikes largely priced in, our more dovish-than-consensus outlook for rates and the New Zealand dollar trading at
extreme valuations, we believe that at current levels, a bearish outlook is still warranted. We further highlight that sentiment surrounding
the NZD is still very bullish, but note that weaker US growth could lead to further monetary easing, which could outweigh any kiwi
weakness from the fundamental factors.
table: Current Account...19
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 Macroeconomic Forecasts ...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
Chapter 5: Key Sectors.. 33
Agribusiness 33
table: Butter Production and Consumption34
table: Milk Production and Consumption .34
table: Milk Production and Consumption, 2013-2018...34
Table: Cheese Production and Consumption35
table: Whole Milk Powder Production and Consumption, 2013-2018 35
table: Milk Production and Consumption .35
Tourism 36
table: New Zealand Whole Milk Powder Production and Consumption, 2008-2013. 36
table: Cheese Production and Consumption (New Zealand 2008-2013). 36
table: Butter Production and Consumption ...36
table: New Zealand Inbound Tourism, 2011-2018...37
Other Key Sectors... 43
table: Pharma Sector Key Indicators43
table: Telecoms Sector Key Indicators43
TABLE: New Zealand Infrastructure Sector Key Indicators.43
Chapter 6: BMI Global Assumptions. 45
Global Outlook. 45
Emerging Market Deceleration45
Table: Global Assumptions.45
Table: Developed States, Real GDP GrowtH, %...46
Table: Emerging Markets, Real GDP Growth, %..47

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