Boston, MA -- (SBWIRE) -- 03/19/2013 -- Core Views

As households continue to deleverage and businesses maintain a cautious stance on employment and investment, we expect domestic demand growth will be relatively benign, and New Zealand's real GDP growth to come in lacklustre pace of 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 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. Debt deleveraging will continue to limit credit growth as the demand for credit remains low, and consumer price inflation is expected to remain below the central bank's 2.0% target.

New Zealand will see its trade balance return to positive territory in 2013 as import growth slows and households save more. A growing trade surplus, assisted by a weakening currency and falling income outflows, will help the country's current account to return to surplus in 2015. This will allow it to gradually pay back its huge external liabilities and reduce its vulnerability to external shocks.

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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 stalling of asset sales and controversial decisions on the country's withdrawal from the second commitment period of the Kyoto Protocol could have been behind the ruling party's popularity ratings, we do not see any immediate threat to its ability to formulate policy. We have downgraded our short-term political risk rating to 84.0 from 85.2 (out of 100), as we believe that the economy's performance will be the main focus in the 2014 elections, and the rising unemployment rate bodes poorly for the National Party.

Major Forecast Changes

With the slight improvement in credit growth to businesses, we believe the probability that the central bank will cut interest rates by another 25 basis points has diminished significantly. As such, we have revised our monetary policy forecast, expecting the central bank to keep rates at a record low of 2.50% until end-2013, implying an increase in our end-2012 forecast to 2.50%.

We have downgraded our expectations for New Zealand's exports, expecting a 1.0% contraction in real terms as its key trading partners, China and Australia, continue to see further deterioration in their economies. Furthermore, on the back of our expectation for the New Zealand dollar to depreciate to NZD0.67/US$ by end 2013, we have forecast real export growth to come in at 3.7%, from our previous estimate of 2.7%.

Key Risks To Outlook

A related risk comes from a global recession, brought about by a recession in the US and potentially China. This would hit the price of New Zealand's export commodities and corporate profits.

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