Country Report New Zealand

Outlook for 2008-09

• The governing Labour Party is struggling to regain popular support in the run-up to the next election, which is expected in September 2008, and the opposition National Party remains well ahead of Labour in the opinion polls.
• Labour will remain under pressure over the weakening economy and high interest rates.
• It remains unclear whether the Emissions Trading Scheme will be voted upon in parliament before the election.
• Continued fiscal surpluses will allow the government to introduce personal tax cuts when the budget for fiscal year 2008/09 (July-June) is announced.
• There are substantial inflationary risks that exist, notably rising oil and food prices, the tight labour market and high capacity utilisation. The Economist Intelligence Unit forecasts that inflation will average 3% a year in 2008-09.
• We forecast that real GDP growth in 2008 will stand at 1.4%, down from 3.5% in 2007. The slowdown will be the result of weaker private consumption growth.
• The New Zealand currency remains volatile. The New Zealand dollar is forecast to strengthen to NZ$1.31:US$1 in 2008 before weakening to NZ$1.39:US$1 in 2009.
• The current-account deficit is forecast to contract to 7% of GDP in 2008, from 7.9% in 2007. The deficit will then narrow further in 2009, to 6.9% of GDP.

Monthly review

• Labour announced in early May that key elements of its regional fuel tax and climate change strategy will be watered down.
• Time is running out for the legislation underpinning the Emissions Trading Scheme to be passed by parliament before the election.
• The government finally confirmed in early May that it has agreed to buy back the rail and ferry assets owned by Toll New Zealand.
• Despite National's criticisms over the Toll New Zealand deal, the party has stated that it will not privatise any state-owned enterprises during its first term in office if it wins the upcoming election.
• The unemployment rate rose to 3.6% in the first quarter of 2008, reflecting a weakening of the previously buoyant labour market. Total employment contracted by 1.3% quarter on quarter, the steepest decline since the late 1980s.
• Wage pressures remained strong in the first quarter of 2008. Private-sector annual wage growth accelerated to a 15-year high of 3.5%.

SOURCE: Country Report