Now Available: New Zealand Business Forecast Report Q1 2014

Strong activity indicators for the manufacturing and services sectors suggest that positive momentum is likely to help support the domestic economy through the next few months. That said, the rise in economic activity has led to a resurgence in external borrowing, which we see as a source of vulnerability that could threaten growth later in 2014 as momentum wanes. With the US and Europe showing signs of a recovery, the decline in demand for New Zealand assets could cause the cost of funding to rise at the margin, which in turn could cause a correction in house prices. Given that growing external indebtedness will increase New Zealand exposure to such risks, we maintain a conservative outlook for 2014 real GDP growth, expecting it to come in at 2.3%.

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We maintain that the Reserve Bank of New Zealand (RBNZ) will keep its policy rate on hold at 2.50% until 2015, despite the strong growth from housing-related credit. The strong currency and comparatively weaker growth in business credit is likely to discourage the central bank from using interest rates to cool the housing market. We expect the central bank to concentrate on cooling the housing market through its macro-prudential rules, and note that more regulation will be likely even after the increased capital requirements and restrictions on the number of low loan-to-value ratio loans (LVR).

Volatile weather and quality/contamination concerns will remain key risks to New Zealand exports, given the changing composition of its external trade. While the return to a positive trade balance is likely to have been delayed, the reduction in external liabilities of the banking sectors has helped both the trade and income accounts. The overall narrowing of 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 to achieve 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. 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 therefore 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. In this respect, the stubbornly high unemployment rate could prove to be a problem for the National party.

Major Forecast Changes

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