The New Zealand economy is experiencing a gradual deleveraging cycle, which will weigh on real GDP growth over the coming years. While declining oil prices will provide some support to corporate profit margins and economic activity, these positives will likely be offset by the joint deterioration in the dairy and construction sectors, which remain the two key pillars of the economy.
New Zealand's fiscal accounts remain in better health compared with most developed market economies. The government returned its budget to a surplus in FY2014/15, and maintained its objectives to grow the country's budget surplus and reduce debt over the coming years during its FY2016/17 budget announcement in May 2016. Given the government's continued commitment to rein in expenditures over the coming years, we expect the country's budget surplus to be maintained, and we forecast a surplus equivalent to 0.4% of GDP in FY2016/17 (versus our estimate of 0.6% in FY2015/16).
Following cuts totalling 125 basis points (bps) since its June 2015 monetary policy meeting, we are forecasting the Reserve Bank of New Zealand (RBNZ) to cut its official cash rate (OCR) by another 25bps to 2.00% in 2016 as a result of a weak economy. With inflation remaining well below its medium-term target of 2.0%, the central bank will also be pressured to ease interest rates in an attempt to spur inflation.
Despite the gradual improvement since 2008, New Zealand's external accounts remain the economy's weak link and a persistent current account deficit poses risks of large-scale capital outflow. In order to correct these imbalances, we will need to see domestic savings rise sharply, while investment growth cools, which will undermine economic growth to some extent.
The New Zealand dollar will likely weaken against the US dollar over the remainder of 2016, and we maintain our average 2016 forecast of USD0.6500/NZD (versus 2015's USD0.7000/NZD). We remain bearish on the NZD over the medium term as the country's elevated level of external indebtedness will leave the currency vulnerable to capital flight amid a weak agriculture sector and precarious property market.
Major Forecast Changes
We maintained our major forecasts as highlighted in our previous Q22016 Country Risk Report, and we highlight the key risks to our outlook below.
We believe that there are two main risks facing the New Zealand economy:
Domestically, a continued surge in property prices could sow the seeds for an eventual sharp decline and associated financial instability owing to the large levels of household debt in the economy and the banking sector's exposure to the mortgage market. The property market is overvalued from a nationwide perspective, but key cities such as Auckland are experiencing what appear to be bubble-like price advances, which left unchecked could create financial instability.
Externally, a sharper than expected decline in Chinese import demand could lead to further declines in dairy prices and export volumes, significantly reversing the enormously beneficial upturn seen in New Zealand's terms of trade over recent years. So far, New Zealand's terms of trade have only deteriorated slightly, but a collapse in Chinese demand could weigh further on New Zealand's dairy export prices.
|e/f=BMI estimate/ forecast. Source: National Sources, BMI|
|Real GDP growth, % y-o-y||3.0||3.4||2.3||2.5|
|Nominal GDP, USDbn||197.3||171.7||163.7||159.6|
|Consumer price inflation, % y-o-y, eop||0.8||0.1||0.0||1.0|
|Exchange rate NZD/USD, eop||1.28||1.46||1.59||1.67|
|Budget balance, % of GDP||-1.1||0.3||0.6||0.4|
|Current account balance, % of GDP||-3.1||-3.1||-2.8||-2.5|
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