Boston, MA -- (SBWIRE) -- 10/28/2013 -- While we have raised our forecast for 2013 real GDP to come in at 2.5%, on the back of improving global sentiment, which is likely to support private consumption growth in New Zealand, we highlight that the uptick driven by stimulus and monetary easing is unsustainable. As such, these upgrades in no way reduce the downside risks that the New Zealand economy continues to face.

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 expect the central bank to concentrate on cooling the housing market through its macro-prudential rules, and note that more regulation will be likely even after the increased capital requirements and restrictions on the number of low loan-to-value ratio loans (LVR).

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Volatile weather and quality/contamination concerns will persist to be key risks to New Zealand exports going forward, given the changing composition of its trade with the external world. While the return to a positive trade balance is likely to have been delayed, the reduction in external liabilities of the banking sectors has helped both the trade and income accounts. The overall narrowing of the current account deficit over the coming years will allow the country to gradually pay back its huge external liabilities and reduce its vulnerability to external shocks.

The National Party remains determined on achieving 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 as it approaches parliamentary elections in 2014. That said, 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 issue of affordable housing to be one of the key issues 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

On the back of improved sentiment surrounding global economy as respective governments and central banks pushed stimulus packages and kept monetary conditions easy, we have raised our 2013 real GDP forecast to 2.5%, as we expect households to participate in this rising sentiment. While we maintain that the economy would eventually need to return to the deleveraging process, in particular, households finances remain extremely precarious, the changing structural of the economy has afford some room as its reliance on neighbouring Australia has declined.

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