INSIGHTS

‘MOOD FOR CHANGE’ WINS ON THE DAY

Mark Lister, 20 October 2017

Some 26 days after the election, and 12 days after special votes confirmed the final result, NZ First leader Winston Peters announced last night he will form a coalition with the NZ Labour party. This will see Jacinda Ardern become the second youngest Prime Minister in New Zealand history, and the third female Prime Minister. The National party ends its nine-year dominance, although it will still be the largest party in parliament by some margin, with 56 seats of 121. This will make National a formidable opposition over the coming three years, especially given the intimate knowledge it has of many ministries. Peters did not mention the Greens, although it was later confirmed that a confidence and supply agreement will exist. Labour/NZ First only have 55 seats between them, but the eight seats of the Greens takes them to a (still very slim) 63 seat majority.

Uncertainty to reign in short-term
In the short-term uncertainty will be the order of the day. The NZ dollar fell sharply overnight, declining around 2% against most trading partners. Ironically, this is a positive for the economy. For example, it is now at close to an 18-month low against the currency of our biggest trading partner, Australia. We have little detail around policy positions, exactly who will be in charge of which portfolios, or how much influence the various players will have. Markets don’t like this, so we could see the NZ dollar weaken further on the back on this, and the local sharemarket could also come under pressure.

Key ares for financial markets
The focal points for financial markets will be potential policy change in terms of housing, foreign ownership, immigration and the Reserve Bank Act. Initiatives to reign in house prices will be high on the list, as will limits on immigration levels. The latter will worry some businesses, especially many in the regions who rely on foreign workers to fill genuine skill shortages. Foreign ownership and the role of the Overseas Investment Office (OIO) will be in line for changes, particularly as they relate to land. The Labour party is unlikely to do anything dramatic in terms of the Reserve Bank, although we might see some fine-tuning of the policy targets agreement, and possibly a broader set of objectives (relating to things like the NZ dollar and employment levels, for example).

Slowing economy is likely, political change or not
New Zealand remains in a robust economic position. We have been forecasting a slowdown for some time, on the back of more modest house price inflation, the flow-on effects to consumer spending, a potential slowing in migration and construction, and risks of higher global interest rates. However, this would be more a case of the heat coming out of our economy, rather than anything more substantial. While the short-term uncertainty and potential policy change might accentuate this process in some ways, we see no need to get outright bearish on New Zealand.

Many fundamentals remain in our favour
Even if it slows a little, growth will likely remain solid, unemployment is low (sub-5%), the agricultural sector has improved dramatically and many parts of the economy are doing very well. Government debt is very low compared to all major developed countries, which leaves for fiscal stimulus should it be required, and while interest rates could drift a little higher over the medium-term they will remain low by historical standards. Finally, the NZ dollar remains above long-term averages against most trading partners, so any weakness on this front would provide a strong boost to the export sector. Financial markets will ultimately put more weight on these fundamentals, rather than political change in Wellington.