COUNTRY REPORT New Zealand New Zealand at a glance: 2002-03 OVERVIEW The Labour-Alliance government still looks set to see out its full term of office, with an election due at end-2002. But it could have a tough year, with the economy weakening and various other issues to contend with. The opposition National Party is beginning to score some hits against the government. Relations with Australia may prove difficult over the next two years. Despite a good start to the year, real GDP growth will slow to 1.7% in 2001, before picking up in 2002-03. Consumer price inflation is likely to remain high until the middle of 2002 in view of the current strength of producer price inflation; thereafter it should return to the 1-2% range. After a sharp contraction in 2001, the result in part of increased agricultural merchandise exports, the current-account deficit will stabilise in 2002 and 2003. The New Zealand dollar is likely to remain volatile in 2002 and 2003, but will tend to strengthen against the US dollar over time. Key changes from last month Political outlook • The collapse of the airline, Ansett Australia, has already complicated trans- Tasman relations, but has yet to seriously dent the public standing of the prime minister, Helen Clark, or her Labour party. Renationalisation could pose some long-term problems. Economic policy outlook • The fiscal outturn for 2000/01 was better than forecast, but slower growth will pull down the budget surplus in 2001/02. The Reserve Bank (the central bank) cut the overnight cash rate by 0.5 percentage points on September 19th, suggesting that worries about inflation levels will take a back seat in monetary policy, for a few months at least. Economic forecast • The September terrorist attacks on the US have increased international economic uncertainty. Accordingly, we have revised down our forecast for 2001 GDP growth in New Zealand to 1.7%, despite a promising first half. We have also increased our forecast for consumer price inflation to 3.2%, in the light of high second-quarter producer price inflation. October 2001 The Economist Intelligence Unit 15 Regent St, London SW1Y 4LR United Kingdom The Economist Intelligence Unit The Economist Intelligence Unit is a specialist publisher serving companies establishing and managing operations across national borders. For over 50 years it has been a source of information on business developments, economic and political trends, government regulations and corporate practice worldwide. The EIU delivers its information in four ways: through our digital portfolio, where our latest analysis is updated daily; through printed subscription products ranging from newsletters to annual reference works; through research reports; and by organising seminars and presentations. The firm is a member of The Economist Group. London New York Hong Kong The Economist Intelligence Unit The Economist Intelligence Unit The Economist Intelligence Unit 15 Regent St The Economist Building 60/F, Central Plaza London 111 West 57th Street 18 Harbour Road SW1Y 4LR New York Wanchai United Kingdom NY 10019, US Hong Kong Tel: (44.20) 7830 1007 Tel: (1.212) 554 0600 Tel: (852) 2585 3888 Fax: (44.20) 7830 1023 Fax: (1.212) 586 0248 Fax: (852) 2802 7638 E-mail: [email protected] E-mail: [email protected] E-mail: [email protected] Website: www.eiu.com Electronic delivery This publication can be viewed by subscribing online at www.store.eiu.com Reports are also available in various other electronic formats, such as CD-ROM, Lotus Notes, online databases and as direct feeds to corporate intranets. For further information, please contact your nearest Economist Intelligence Unit office Copyright © 2001 The Economist Intelligence Unit Limited. All rights reserved. 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New Zealand 1 Contents 3 Summary 4 Political structure 5 Economic structure 5 Annual indicators 6 Quarterly indicators 7 Outlook for 2002-03 7 Political outlook 8 Economic policy outlook 9 Economic forecast 13 The political scene 17 Economic policy 20 The domestic economy 20 Output and demand 22 Employment, wages and prices 24 Financial indicators 25 Sectoral trends 29 Foreign trade and payments List of tables 9 International assumptions summary 10 Forecast summary 11 Gross domestic product by expenditure 21 Expenditure on gross domestic product 22 Gross domestic product by sector 24 Interest and exchange rates 30 Current account List of figures 13 Gross domestic product 13 New Zealand dollar real exchange rates 20 Quarterly gross domestic product 29 External balances EIU Country Report October 2001 © The Economist Intelligence Unit Limited 2001 New Zealand 3 Summary October 2001 Outlook for 2002-03 The September terrorist attacks on the US have increased uncertainty about the global economy. The government may need to accept lower than forecast budget surpluses, and the Reserve Bank (the central bank) will take a more expansionary approach to monetary policy. GDP growth is now forecast to pick up to 2.2% in 2002 and 3.4% in 2003, after dipping to an estimated 1.7% in 2001. Consumer price inflation is likely to average 3.2% in 2001, before falling back in 2002 and 2003. Having fallen back sharply in 2001, the current-account deficit will stabilise as a percentage of GDP in 2002-03. The political scene The failure of the airline, Ansett Australia, has led to Australian criticism of Air New Zealand, of which Ansett is a subsidiary, and, by implication, of New Zealand generally. Previously, Australia had welcomed New Zealand’s help in resolving a refugee crisis. The government has ordered a major examination of defence management. National’s rank and file members have voted for a new party president. Economic policy The government has already announced a partial bail-out of Air New Zealand, with a stand-by loan conditional on Singapore Airlines and Brierley Investments injecting more funds into the company. The former prime minister, Jim Bolger, will be the chairman of the new “Kiwibank”. Immigration policy will be eased further. The domestic economy There was robust GDP growth in the second quarter, with a rebound in business investment after a depressed first quarter. Private and government consumption also rose, but housing investment remained depressed. Export growth remained rapid. The labour market continued to tighten. Consumer price inflation remained outside the target range, as producer prices began to rise rapidly. The Reserve Bank made a surprise 0.5 percentage point cut to the Overnight Cash Rate (OCR) on September 19th, and wholesale interest rates have fallen sharply. The New Zealand dollar has weakened further. An elec- tricity shortage hit production in July-August, and electricity generators have been accused of cashing in. Record production levels in several agricultural subsectors in 2000/01 are unlikely to be matched in 2001/02, for a number of reasons. The government’s stance on genetic modification has caused concern. Foreign trade and The current account continued to improve in the second quarter, with a deficit of payments just NZ$297m (US$126m). The primary factor was a strong improvement in the merchandise trade surplus. There was also a slight decline, year on year, in the services and income deficits. Recently published statistics on investment stocks and flows are incomplete. Editors: Graham Richardson (editor); Danny Richards (consulting editor) Editorial closing date: October 1st 2001 All queries: Tel: (44.20) 7830 1007 E-mail: [email protected] Next report: Full schedule on www.eiu.com/schedule EIU Country Report October 2001 © The Economist Intelligence Unit Limited 2001 4 New Zealand Political structure Official name New Zealand Form of state Parliamentary monarchy National legislature Unicameral House of Representatives of 120 members elected using the mixed-member proportional electoral system for a three-year term Electoral system Universal direct suffrage over age 18 National elections November 27th 1999; next general election due by December 2002 Head of state Queen Elizabeth II, represented in New Zealand by the governor-general, Dame Silvia Cartwright National government Cabinet presided over by the prime minister, appointed by the governor-general on the basis of party strength in the House of Representatives Main political parties Labour Party (49 seats); National Party (39 seats); Alliance (ten seats); ACT New Zealand (nine seats); Green Party (seven seats); New Zealand First (five seats); United NZ (one seat) Government Prime minister, minister for arts & culture & minister in charge of the Security Intelligence Services Helen Clark (Labour) Deputy prime minister, minister of economic development & minister for industry & regional development Jim Anderton (Alliance) Key ministers Agriculture, trade negotiations, rural affairs Jim Sutton (Labour) Attorney-general, Treaty of Waitangi negotiations, labour Margaret Wilson (Labour) Commerce, communications,