Country Report New Zealand January 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 Economist Intelligence Unit forecasts that the fiscal deficit will increase from an estimated 1% of GDP in fiscal year 2007/08 (July-June) to 6.3% in both 2008/09 and 2009/10.
• The Reserve Bank of New Zealand (RBNZ, the central bank) has cut the official cash rate (OCR) by 325 basis points since July. The bank is likely to cut interest rates again at its next policy meeting in January and thereafter.
• We have revised down our forecast for real GDP in 2009, owing to a deteriorating outlook for exports and domestic demand. We now expect GDP to contract by 1.9% in 2009 and to grow by just 0.5% in 2010.
• The RBNZ expects inflation to fall back within the 1-3% target band in the first half of 2009. We forecast that inflation will average 2.4% in 2009.
• We forecast that the New Zealand dollar will depreciate from an estimated NZ$1.42:US$1 in 2008 to NZ$1.84:US$1 in 2009 and NZ$1.96:US$1 in 2010, reflecting interest rate cuts and risk-aversion on the part of investors.
• The deficit on the income account will remain sizeable, although the trade deficit will narrow. The current-account deficit is forecast to contract to the equivalent of 6.7% of GDP in 2009, from an estimated 9% of GDP in 2008.

Monthly review

• National has accused the former Labour Party-led government of deliberately misrepresenting the fiscal accounts. The Accident Compensation Corporation (a national accident-compensation scheme) is facing a major budget shortfall.
• On December 23rd Fiji's interim government expelled the New Zealand high commissioner to Fiji, Caroline McDonald. The following day New Zealand reacted by expelling her Fijian counterpart, Cama Tuiloma.
• The RBNZ slashed interest rates by 150 basis points on December 4th, bringing the OCR to 5%. The move was a response to the severe deterioration in the economic outlook for New Zealand and its major trading partners.
• Real GDP contracted by 0.7% quarter on quarter in the third quarter of 2008the largest such fall since the second quarter of 2000.
• A survey by the National Bank of New Zealand in December showed that 22% of the domestic firms questioned expected to be worse off in 2009.
• The seasonally adjusted current-account deficit shrank to NZ$4.1bn (around US$2.7bn) in the third quarter of 2008, from NZ$4.7bn in the previous quarter.