Country Report New Zealand July 2009

Outlook for 2009-10

• The government, led by John Key of the National Party, enjoys strong public support and a large parliamentary majority by New Zealand's standards, putting the administration in a good position to push through its agenda.
• As a result of lower revenue growth and increased expenditure commitments, government debt will balloon to nearly 40% of GDP by 2013. The fiscal deficit will expand to an average of 6.5% of GDP in 2009-10.
• The central bank is likely to cut interest rates again in 2009 and to keep rates low in 2010. The policy rate is expected to average 2.2% in 2009-10.
• The outlook for the economy is gloomy. The Economist Intelligence Unit forecasts that real GDP will contract by 2.6% this year, before growing by just 0.7% in 2010.
• It is unlikely that further monetary policy loosening will spur a rise in consumer prices; the Reserve Bank of New Zealand (the central bank) believes that inflation could temporarily fall below its 1-3% target range in 2009.
• The current-account deficit is forecast to narrow to the equivalent of 7.1% of GDP in 2009 and 6.8% in 2010.

Monthly review

• Seven months into its first term, the government has suffered its first ministerial casualty and an unsurprising by-election defeat.
• The New Zealand government and representatives of the country's dairy industry have strongly criticised the US government's decision to introduce export subsidies on dairy produce to help support US dairy farmers.
• The government handed down its first budget, for fiscal year 2009/10 (July-June), on May 28th. The budget looks to have struck a balance between stimulating the economy and restraining growth in government debt.
• Treasury unveiled a bleak but probably realistic economic forecast for the near and medium terms in the budget, with the recession now expected to be deeper and to last longer than previously projected.
• The introduction of export subsidies by the EU and the US could have serious implications for the New Zealand economy.
• New data suggest that the construction sector remains in the doldrums. The seasonally adjusted volume of work undertaken fell by 0.7% quarter on quarter in January-March 2009??