Research Team, 26 May 2017

Markets have had another mixed week, rocked early in the week by a terror attack in the UK. The geopolitical uncertainty caused by this event saw markets across most of the globe fall. Although the market losses were made up in the following sessions, the uncertainty also resulted in seen lower trading volumes, as investors chose to sit on the sidelines.

The big economic event in New Zealand was the announcement of the 2017 budget. In previous years, the budget has been somewhat of a non-event with most policies drip-fed to the public prior to budget day. However with a surplus to play with and an election coming up the anticipation for this year’s budget was high, and it didn’t disappoint.

Thursday’s Budget was the most generous we have seen in years, and National looks to have struck the right balance between spending more where it is necessary, yet remaining fiscally responsible. The reaction from financial markets was limited, reflecting comfort with the current path of the economy and the responsible approach the Government is taking to an improving economic and fiscal position.

The economic and fiscal forecasts in the Budget painted a picture of a strong economy that is growing at a robust pace. It points to a healthy surplus of $2.9 billion in 2017/18, rising to $7.2 billion in 2020/21. GDP growth is forecast to increase to a peak of 3.8% in 2019, before tapering off to a still impressive 2.4% in 2021. Migration is likely to remain strong, supporting this strong growth profile. As a result, GDP per capita is forecast to be more modest at 1.8% in 2019, slipping to 1.1% in 2021. The unemployment rate is forecast to decline to 4.3% in 2020, with inflation rising modestly over the next few years. Debt continues to fall in the forecasts, so the target of Crown debt at 20% of GDP by 2019/20 is met, while also allowing Superannuation Fund contributions to resume at that point.

The key to this budget was the $2 billion Family Incomes Package. As expected, this will see tax relief by way of changes to income brackets. The upper threshold for the lowest tax rate of 10.5% increases from $14,000 to $22,000, and the threshold for the next bracket of 17.5% rises from $48,000 to $52,000. The top threshold of $70,000 (where the top tax rate of 33% kicks in) is unchanged. This is looking to target low to middle income earners, trying to put more cash back in their pockets.

Other notable announcements include a change to the family tax credits, increased accommodation supplement, a $7 billion increase in public service spending (of which $3.9 billion for health, $1.1 billion for education and $1.2 billion for law and order), and a $4 billion increase in infrastructure spending. Following the budget announcement, the New Zealand dollar spiked, however this was pared back quickly while the NZX50 moved sideways.

Fonterra made an important announcement this week, raising the forecast Farmgate Milk Price by 15 cents per kilo of milk solids. This takes the per kilo price to $6.15, the highest we have seen since the 2013/14 season. When combined with the dividend, the total payment to farmers rises to $6.55, representing the first time in three seasons that the forecast payout will be above the Dairy NZ estimated breakeven amount.  In addition to this, the forecast for the 2017/2018 season was announced to be $6.50, further positive news for the dairy sector.

The local reporting season continued this week, the busiest week for the May reporting season. Fisher & Paykel Healthcare was one of note, however the result was a little bit weaker than expected. The company delivered FY17 earnings that were in line with guidance provided in November, with the hospital business continuing to deliver exceptional growth. The disappointment came from the outlook for 2018, which came in well below expectations reflecting the higher than expected litigation costs.