Country Report New Zealand September 2009

Outlook for 2009-10

• The government, led by John Key of the centre-right National Party, enjoys strong public support and a large parliamentary majority by New Zealand's standards, putting it in a good position to push through its agenda.
• The Economist Intelligence Unit expects government debt to balloon to the equivalent of 35% of GDP by 2010; the fiscal deficit will rise to the equivalent of 6.8% of GDP in 2009 before edging down to 6.4% of GDP in 2010.
• Real GDP is forecast to contract by 2.1% in 2009 before increasing by just 1.2% in 2010.
• Inflation is comfortably within the 1-3% medium-term target range set by the Reserve Bank of New Zealand (the central bank). Prices are forecast to rise by an average of 1.8% in 2009 and 1.5% in 2010.
• The New Zealand dollar will remain highly vulnerable to changes in investor risk appetite. We expect the local currency to weaken from NZ$1.42:US$1 in 2008 to NZ$1.69:US$1 in 2009 and NZ$1.76:US$1 in 2010.
• The current-account deficit is forecast to narrow to the equivalent of 7.7% of GDP in 2009 and 7.6% of GDP in 2010 as the trade balance swings into surplus.

Monthly review

• The latest opinion poll shows that National holds a commanding lead over the main opposition Labour Party.
• The government has announced a carbon emissions reduction target, which would see a cut in emissions to 10-20% below 1990 levels by 2020.
• The government is looking at ways to boost economic growth in the medium and longer term, with the aim of reducing the productivity and living-standards gap with Australia.
• A ministerial review of the electricity sector has reported its preliminary recommendations. Central to the review was the need to contain electricity prices and improve energy security and competition in the sector.
• Headline inflation retreated to 1.9% year on year in the second quarter, from 3% in the first quarter, as the ongoing domestic recession and lower global oil prices fed through to weaker price pressures.
• The labour market weakened sharply in the second quarter of 2009. The seasonally adjusted unemployment rate jumped to a nine-year high of 6% in April-June, from 5% in the previous quarter.
• Wage growth has slowed significantly in the face of the weaker labour market and lower inflationary expectations.

Source: Country Report