Country Report New Zealand April 2009

Outlook for 2009-10

• The centre-right National Party has a strong popular mandate and a robust parliamentary majority by New Zealand's standards, putting the new prime minister, John Key, in a good position to push through his agenda.
• The new government will be committed to the principle of free trade, and will actively pursue free-trade agreements with a number of countries and trading blocs in 2009-10.
• Personal income tax cuts will be implemented from April 1st, but the government's commitment to further tax cuts in April 2010 is now uncertain.
• Additional large cuts to the official cash rate (OCR, the main policy interest rate) that would bring New Zealand close to a near-zero interest rate policy are not expected, although smaller reductions are likely.
• Real GDP is expected to contract by 3.2% in 2009, owing in large part to the ongoing deterioration in import demand from New Zealand's main trading partners and an increasingly dreary outlook for domestic consumption.
• The Economist Intelligence Unit forecasts that average consumer price inflation will slow to 1.6% in 2009 and 1.3% in 2010.
• The current-account deficit will shrink on the back of an improvement in the trade deficit. The income deficit will fall but remain substantial.

Monthly review

• The new government has delivered on a multitude of election pledges for its first 100 days in office.
• On March 12th the Reserve Bank of New Zealand (RBNZ, the central bank) reduced the OCR by a further 50 basis points, to 3%, bringing the cumulative rate reduction since July 2008 to 525 basis points.
• The RBNZ expects the domestic economy to bottom out by mid-2009. Economic activity is set to pick up slowly thereafter, underpinned by fiscal stimulus, monetary policy loosening and export growth.
• The main policy outcome of the recent jobs summit was the idea of a nine-day fortnight, a scheme subsequently approved by the cabinet.
• Retail sales fell by 1.1% month on month in January, reflecting consumers reluctance to make major purchases, the impact of the New Zealand dollars depreciation against the US dollar and tighter credit restrictions.
• The latest Roy Morgan Consumer Confidence Index suggests that consumer gloom is deepening; the index fell from 100.4 in early February (ratings above 100 indicate optimism) to 95.9 in early March, its lowest since August 2008.