Boston, MA -- (SBWIRE) -- 08/06/2013 -- As households continue to deleverage and the government is likely to intervene to restrain optimism around New Zealand's housing market, we expect private consumption growth will be relatively benign, and forecast New Zealand's overall real GDP growth to come in at 2.2% in 2013. Risks remain firmly weighted to the downside as the uncertainties surrounding other economies persist.

We believe that the Reserve Bank of New Zealand (RBNZ) will keep interest rates on hold at 2.50% until 2014, keeping monetary conditions easy as the economy adjusts to a slower rate of credit growth. Indeed, we see growing risks of a rate cut as the deterioration in external economies is likely to keep the job market soft due as businesses remain cautious about spending and hiring.

New Zealand will see its trade balance return positive in 2013 as we expect New Zealand's import growth to slow as households save more. With a growing trade surplus, assisted by a weakening currency and falling income outflows will aid the country's current account to return to surplus in 2015. This will allow the country to gradually pay back its huge external liabilities and reduce its vulnerability to external shocks. However, unpredictable dry weather could affect agricultural exports and poses downside risk to our projections.

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The National Party remains determined to achieve its goal of returning the fiscal budget to surplus in fiscal year 2014/15. While the issues of housing affordability, drought assistance for farmers and controversial decisions on the country's pull-out from the second commitment period of the Kyoto Protocol remain contentious topics that could affect the ruling party's popularity in the months ahead, we do not see any immediate threat to its ability to formulate policy. We maintain our short-term political risk rating at 84.0 (out of 100), and expect the economy's performance to remain the main focus in the 2014 elections. In this respect, the stubbornly high unemployment rate could prove to be a problem for the National party.

Major Forecast Changes

We have revised down our expectations for current easy monetary conditions to persist for longer despite the continual rise in house values beyond 2007 highs. The main driver of this view is our expectation for declining external demand to prove too great for businesses to ignore, which could, in turn, weigh on domestic demand. Indeed, we now see a growing possibility for the RBNZ to cut rates instead to support businesses. That said, we maintain our expectations for the central bank to increase its use of macroprudential tools to help temper household credit growth.

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