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 posted a budget surplus equivalent to 0.3% of GDP for FY2014/15 (July-June), fulfilling its promise made in 2011 to return the government's accounts to positive territory by FY2014/15. We expect the country's fiscal surplus to continue growing over the coming years, and this will be supported by continued spending restraint, which should keep government spending relative to GDP stable even as the welfare burden grows.
Following cuts totalling 75 basis points (bps) since its June monetary policy meeting, we are forecasting the Reserve Bank of New Zealand (RBNZ) to cut its official cash rate (OCR) by 25 basis points (bps) to 2.50% by Q116 as a result of a weak economy. With inflation remaining 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.
We forecast the New Zealand dollar to fall against the US dollar over the medium term, and to weaken to USD0.5500/NZD by the end of 2016 as a result of declining real interest rates amid slowing economic activity, coupled with elevated level of external indebtedness.
Major Forecast Changes
The RBNZ remains dovish, despite choosing to keep its OCR steady at 2.75% at its latest October monetary policy meeting, and we forecast the central bank to ease its benchmark policy rate by 25bps to 2.50% in light of a worsening economy and inflation that is running below its medium-term target.
We now forecast the New Zealand dollar to depreciate towards USD0.5500/NZD by the end of 2016 (versus USD0.6200/NZD previously). The New Zealand dollar will continue to face fundamental downside pressure as real interest rate expectations fall. Meanwhile, New Zealand's current account deficit continues to worsen, and we forecast it to narrow only slightly to 3.0% in 2015 and 2.5% in 2016. We do not believe that this will be sustained as foreign investors become unwilling to fund the country's large current account deficit in light of weakening growth and property market weakness.
Key Risks To Outlook
We believe 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, 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.
|f=BMI forecast. Source: National Sources, BMI|
|Real GDP growth, % y-o-y||2.5||3.3||2.4||2.5|
|Nominal GDP, USDbn||184.6||197.3||171.2||164.7|
|Consumer price inflation, % y-o-y, eop||1.6||0.8||0.6||1.5|
|Exchange rate NZD/USD, eop||1.22||1.28||1.67||1.82|
|Budget balance, % of GDP||-1.9||-1.1||0.3||0.6|
|Current account balance, % of GDP||-3.4||-3.3||-3.0||-2.5|
The New Zealand Country Risk Report helps businesses with market assessment, strategic planning and decision making to promote growth and profitability in New Zealand. It is an essential tool for CEOs, Chairmen, Finance Directors/CFOs, Managing Directors, Marketing/Sales Directors with commercial interests in this emerging market.
An influential new analysis of New Zealand's economic, political and financial prospects through end-2019, just published by award-winning forecasters, Business Monitor International (BMI).
- Forecast the pace and stability of New Zealand's economic and industry growth through end-2019.
- Identify and evaluate adverse political and economic trends, to facilitate risk mitigation.
- Assess the critical shortcomings of the operating environment that pose hidden barriers and costs to corporate profitability.
- Contextualise New Zealand's country risks against regional peers using BMI's country comparative Risk Index system.
- Evaluate external threats to doing business in New Zealand, including currency volatility, the commodity price boom and protectionist policies.
BMI provides our fully independent 5-year forecasts for New Zealand through end-2019 for more than 50 economic and key industry indicators. We evaluate growth, and also forecast the impact of economic management.
Economic Outlook Contents
The New Zealand Country Risk Report features BMI's forecasts with supporting analysis for 2015 through to end-2019, set against government views and BMI's evaluation of global and regional prospects.
Key Areas Covered:
- Full 10-year forecasts with data - for key macroeconomic variables including GDP (real growth and per capita), population, inflation, current account balance and the exchange rate.
- BMI's comprehensive Risk Index system - rates each country worldwide for economic and political risk, and rates the business environment, within a global and regional context.
- Economic Activity - real GDP growth, employment, inflation, consumption (retail sales and confidence).
- Balance of Payments - trade and investment, current and capital account.
- Monetary Policy - interest rate trends (bank lending and deposit rates) and inflation (producer price and consumer price).
- Exchange Rate Policy - currency controls, foreign investment flows, exchange rates and foreign exchange reserves.
- Fiscal Policy - macroeconomic strategy and policies, government finance and tax reforms.
- Foreign Direct Investment - approvals, inflows and climate.
- External Debt - debt profile (short and long-term plus public and private sector obligations).
- Global Assumptions - forecasts for each year to end-2019 covering: major commodities, growth in key regions, inflation, and interest and exchange rates, in the United States, Japan, China and the eurozone.
- Rely upon BMI's 100% independent forecast scenarios for New Zealand and underlying assumptions - we take no advertising and are privately-owned.
- Exploit the benefits of BMI's comprehensive and reliable macroeconomic database on New Zealand, sourced and fully maintained by BMI from an extensive network of private sector, government and multilateral contacts.
- Gain key insights into the current and future direction of government economic policy, which could significantly affect your company's business prospects, from BMI's team of analysts and economists.
What are the political risks to doing business in New Zealand over the next 5-years?
BMI's New Zealand country Risk Index evaluates the short- and medium-term threats to political stability.
Political Outlook Contents
- SWOT Analysis for the New Zealand Market - Political Strengths, Weaknesses, Opportunities and Threats facing New Zealand.
- Political Stability and Risk Assessment - BMI's Risk Index assesses explicit short- and long-term risks to political stability; latest positioning and trends for New Zealand's risk are compared with regional and global averages.
- Current Administration and Policy-making BMI assesses the threats to the continuity of economic policy, and likely changes to the business operating environment.
- Long-Term Political Outlook BMI examines the structural risks to the stability of New Zealand’s political system and the dominant public policy issues likely to affect decision-makers, and outlines scenarios for how the state could evolve in the medium to long term.
- Benchmark New Zealand's risk profile against its neighbours, the global and regional average, allowing easy comparison of risks between key business markets.
- Identify, evaluate and anticipate political and security risks to the business environment, and to your company's current operations and future plans.
- Gain valuable insights into government and policy-making, through BMI's specialist team of analysts and economists, and their network of private and public sector sources.
What are the current operational risks and difficulties associated with doing business in New Zealand?
The Operational Risk section gives an evaluation of current risks and difficulties associated with operating in the market. It also provides a brief overview of the regional Operational Risk Index which benchmarks New Zealand against its neighbours.
Operational Risk Contents
The chapter provides a summary of the main threats in the country, within:
- Labour Market Risk (Education; Availability of Labour; and Labour Costs)
- Logistics Risk (Market Size and Utilities; Quality and Extent of the Transport Governance)
- Trade and Investment Risk (Economic Openness; Government Intervention; and Legal Risks)
- Crime and Security Risk (Crime; Terrorism; and Interstate Conflict risks).
Key Sector Outlook*
Which industry sectors in New Zealand will grow fastest, and where are the major investment opportunities in the market?
BMI identifies investment opportunities in New Zealand's high growth industries including automotives, defence & security, food & drink, freight transport, infrastructure, oil & gas, pharmaceuticals & healthcare and telecommunications & IT.
Key Areas Covered:
- Market Overview - Size and value of each industry, including recent sector developments and major industry key performance indicators (KPIs) that have impacted company performance.
- 5-year Industry Forecasts - Forecasts for each year over 2015-2019, using BMI's proprietary industry modelling technique, which incorporates key domestic and international indicators - including economic growth, interest rates, exchange rate outlook, commodity prices and demographic trends - to provide fully integrated forecasts across and within each industry.
- Demand- and Supply-Side Data/Forecasts - BMI's industry data covers both the output of each industry and the domestic demand, offering clear analysis of anticipated import/export trends, as well as capacity growth within each industry.
- Target strategic opportunities in high growth industries, which are benefiting from global mega trends, and thus offer strong investment and growth opportunities.
- Compare the growth path of different industries to identify which are best placed to benefit from domestic and international economic prospects, and which have historically suffered from volatile growth trends - a key indicator of future risks.
*Not all Country Reports contain the Key Sector Outlook chapter. Please enquire above for more information.