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New Zealand Country Risk Report Q4 2018

New Zealand Country Risk Report Q4 2018

Key View:

New Zealand's real GDP growth decelerated to 3.0% y-o-y and 1.1% q-o-q seasonally adjusted annualised in Q118, respectively (from 3.2% and 1.7% in Q417), and we are maintaining our 2018 real GDP growth forecast of 2.7%. Our expectations are informed by a weak housing market outlook dragging residential investment and subdued private consumption growth, despite support from the external sector and government spending.

We are now forecasting the RBNZ to not only hold its policy interest rate at 1.75% through 2018, but also in 2019, after taking into account the central bank's updated forward guidance during its August meeting. We expect the central bank to look to keep monetary conditions accommodative to spur higher inflation and to support a slowing economy.

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, domestic savings will need to rise sharply, which will undermine economic growth to some extent.

We are revising our 2018 average forecast for the New Zealand dollar to USD0.68/NZD (from USD0.72/NZD previously) due to bearish technicals and negative sentiment stemming from the market's dovish interpretation of the RBNZ's monetary policy stance and rising trade tensions. Our 2019 average forecast is now USD0.63/NZD from USD0.71/NZD previously and continues to reflect the unit's vulnerability to investment outflows from slowing growth and rising inflation.

Major Forecast Changes

We have revised the average exchange rate forecast for 2018 to USD0.78/NZD from USD0.72/NZD previously.

We now expect the RBNZ to only hike its policy interest rate in 2020, from 2019 previously.

Key RisksWe believe that there are two main risks facing the New Zealand economy:

Domestically, property prices could see a 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, significantly reversing the enormously beneficial upturn seen in New Zealand's terms of trade over recent years. A collapse in Chinese demand could weigh further on New Zealand's dairy export prices.


Executive Summary
Core Views
Major Forecast Changes
Key Risks
Country Risk Summary
Economic Risk Index
Political Risk Index
SWOT
Economic – SWOT Analysis
Political – SWOT Analysis
Economic Outlook
Economic Growth Outlook
New Zealand's Q118 Growth Weakness To Persist
GDP By Expenditure Outlook
TABLE: GDP GROWTH FORECASTS
TABLE: PRIVATE CONSUMPTION FORECASTS
TABLE: GOVERNMENT CONSUMPTION FORECASTS
TABLE: FIXED INVESTMENT FORECASTS
TABLE: NET EXPORTS FORECASTS
Outlook On External Position
TABLE: MAIN EXPORT AND IMPORT PARTNERS
TABLE: MAIN EXPORTS AND IMPORTS
TABLE: CURRENT ACCOUNT BALANCE FORECASTS
TABLE: CAPITAL & FINANCIAL ACCOUNT BALANCE
Monetary Policy
Reserve Bank Of New Zealand To Hold Through 2019
Monetary Policy Framework
TABLE: MONETARY POLICY FORECASTS
Structural Fiscal Position
TABLE: FISCAL AND PUBLIC DEBT FORECASTS
TABLE: MAIN REVENUE AND EXPENDITURE CATEGORIES
New Zealand Country Risk Q4 2018ContentsCurrency Forecast
Revising New Zealand Dollar Forecasts Weaker As Negative Sentiment Rises
TABLE: CURRENCY FORECAST
10-Year Forecast
The New Zealand Economy To 2027
Deleveraging Will Weigh On Growth
TABLE: LONG-TERM MACROECONOMIC FORECASTS
Political Outlook
Domestic Politics
New Zealand-Australian Ties To Weather Immigration Dispute
TABLE: POLITICAL OVERVIEW
Long-Term Political Outlook
Stability To Prevail, But Not Without Challenges
Global Macro Outlook
Strong Growth, But Greater Headwinds Too
TABLE: GLOBAL MACROECONOMIC FORECASTS
TABLE: DEVELOPED STATES, REAL GDP GROWTH, % y-o-y
TABLE: EMERGING MARKETS, REAL GDP GROWTH, % y-o-y
Index Tables
TABLE: NEW ZEALAND – MACROECONOMIC DATA & FORECASTS

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