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Deutsche Bank Research: Pre-election Fiscal Update

Economic Note (New Zealand)
NZ: Pre-election Fiscal Update

Key Points

Treasury is forecasting a bounce-back in GDP in H2/99. However, due to the negative Q2/99 GDP result (minus 0.3%), the GDP forecast for the current year has been revised down from 2.9% to 2.3%.

Growth is projected to strengthen to 3.5% in 2000/01 as the export recovery gathers pace, followed by a renewed moderation.

The current account deficit is forecast to peak at 8.3% of GDP in early 2000 as a result of temporary factors (rising oil prices, importation of another naval frigate, rising dividend outflows, etc).

Inflation is forecast to spike up to 2.7% in early 2000, due to one-off and transitory factors (oil prices, NZD weakness, local authority rates, car registration fees, etc).:::Thereafter inflation is projected to oscillate around the 2% mark.

Underlying the Treasury outlook is an assumed significant rise in monetary conditions over the next two years: 90 day rates are assumed to be at 7.0% in early 2002, with the TWI recovering by 8% to 58.7. That implies an MCI of 140 at that point.

The fiscal outlook has been revised up marginally, due to a slightly stronger economy and some expenditure changes offsetting the cost of the $400m tax cut promised by the National Government for 1 April 2000.

The operating balance is forecast to recover from around zero to 1.9% of GDP over the next three years.

Due to stronger-than-expected cash flows (sale of minor assets, higher SOE dividends, lower student loan uptake), the Debt Management Office has reduced the 1999/00 bond programme by $800m, with the 2 December tender ($250m) having been cancelled. Next week's tender of $250m will go ahead.

Market reaction: the high current account deficit outlook generated some downside for the NZD, while the bond market rallied on the back of the reduced tender programme.


The Treasury outlook should be taken as a guide to what the RBNZ is likely to project on 17 November:

A stronger medium-term GDP profile, following a bounce-back in activity in Q3/99.

A significant rise of the current account deficit (although not necessarily to the apparent worst-case-scenario highs projected by the Treasury).

A significant rise in near-term inflation into the 2.5-3.0% range, followed by a slower return to the 1.5% region than published in August.

An assumed recovery of the TWI from current lows, although to a lower endpoint than projected in August.

An implied stronger contribution from interest rates to the monetary tightening process, with a projected 90 day rate for H2/01 of around 6.75% compared to the August forecast of 6.0%.

Given the expected bearish nature of the RBNZ statement and the increasing market focus on the likely details of that release, we see further downside to NZ fixed interest markets over coming weeks. While there has been good domestic support recently, there is the risk that the market could suffer from a sharp deterioration in international investor sentiment, with both the RBNZ statement and the 27 November election providing key event risks.

Treasury's Economic Outlook

(Annual average %::::::::::1999:::::2000:::::2001:::::2002::::: 2003 change, March years)::::: Actual:::Pre-EFU::Pre-EFU::Pre-EFU:::Pre-EFU

Private Consumption::::::::1.3::::: 1.7::::: 2.7::::: 2.9::::: 2.1

Public Consumption::::::::-0.4::::: 6.4:::::-3.7:::::-0.9::::: 1.0

Total Private Investment:::2.0::::: 11.2::::: 5.3::::: 9.3::::: 9.4

Exports::::::::::::::::::::2.1::::: 3.2::::: 8.2::::: 5.2::::: 4.6

Imports::::::::::::::::::::3.4::::: 10.2::::: 2.9::::: 6.4::::: 6.9

GDP (Production Measure) -0.2::::: 2.3::::: 3.5::::: 3.3::::: 2.9

Unemployment Rate::::::::::7.2::::: 7.0::::: 6.3::::: 5.7::::: 6.0

Current Account Balance:::-5.8::::: -8.3:::::-6.4:::::-6.1::::: -5.8
(% of GDP)

CPIX Inflation:::::::::::::1.0::::: 2.7::::: 1.8::::: 2.1::::: 1.6

Fiscal Operating Balance:::1.8::::: 0.0::::: 0.7::::: 1.4::::: 1.9
(% of GDP)

Net Crown Debt:::::::::: 21.8::::: 22.4:::::21.5:::::19.8::::: 17.8
(% OF GDP)

90-day Bill Rate:::::::::: 4.5::::: 5.0::::: 6.0::::: 7.0::::: 6.5

TWI:::::::::::::::::::::::57.6::::: 56.3:::::57.5:::::58.7::::: 60.0

Source: DB Global Markets Research, Treasury


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