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New Zealand Business Forecast Report Q4 2012

New Zealand Business Forecast Report Q4 2012 - new country guide report published

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2013-01-01 01:41:54 - New Zealand Business Forecast Report Q4 2012 - a new country guide report on

With economies of its key trading partners starting to deteriorate, the external environment will help boost flagging domestic demand in New Zealand. As households continue to deleverage and the outlook for businesses sour, we expect demand growth to be poor, and New Zealand´s real GDP growth to come in weak at 1.7% in 2012. We believe that the risk of recession is growing as fewer factors now mitigate any further deterioration of demand growth.

The Reserve Bank of New Zealand is likely to keep interest rates on hold through 2013 as the economy slowly rebalances. Debt deleveraging will continue to limit money supply growth as the demand for credit remains low, reducing upward pressure on consumer price inflation. New Zealand will



see its 40-year run of current account deficits come to an end by 2013 as foreign investors become increasingly reluctant to finance New Zealand´s imports as the domestic economy slows. A strong trade surplus, assisted by a weakening currency and falling import growth, will aid this process and will allow the country to gradually pay back its huge external liabilities and reduce its vulnerability to external shocks.

The National Party recently delivered its first budget since the election. It has retained a goal of achieving a balanced budget by 2014/15. While the lack of details has led to some loss in voter support, to the benefit of the opposing Labour and Green parties, we do not see any immediate threat to its ability to formulate policy. We have maintained our short-term political risk rating at 85.2 (out of 100), but highlight that shortcomings in policy planning could impede the success of the implementation of divisive policies such as the asset sales.

Major Forecast Changes

With the slight improvement in the credit growth to businesses, we believe that the probability that the central bank will cut by another 25 basis point has diminished significantly. As such, we have revised our monetary policy forecast, expecting the central bank to keep rates at a record low of 2.50% until end-2013, implying a bump up of our 2012-end forecast to 2.50%.

We have downgraded our expectations for New Zealand exports, expecting it to contract by 1.0% in real terms as its key trading partners, China and Australia, continue to see further deterioration in their economies. Furthermore, on the back of our expectation for the New Zealand dollar to depreciate in 2013 to NZD0.67/US$ by end 2013, we have forecast real growth of exports to come in at 3.7%, from our previous estimates of 2.7%.

Key Risks To Outlook

The most pertinent risk comes from a banking crisis in Australia, which would likely spread to New Zealand given the external borrowing of local banks. While not our core view, this could trigger a severe debt deflation spiral in the country. Another related risk comes from a global recession, brought about by a recession in the US and potentially China. This would hit the price of New Zealand´s export commodities and corporate profits.

A strong New Zealand dollar, supported by demand for ´safe´ assets as uncertainty surrounding the eurozone continues, could cause the country to accumulate even greater external imbalances. There is a possibility that this could lead to reflation in the housing market. But ultimately, we still believe that the economy will have to deleverage and redistribute resources to productive sectors in the economy. On the positive side, there is a risk that further interest rate cuts by the Reserve Bank of New Zealand and Reserve Bank of Australia, could trigger a revival of the housing market, similar to the one in Australia in 2009. This poses upside risks to our weak growth forecast.

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Mike King
Phone: London: +44 (0) 203 086 8600

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