New Zealand: Risk Assessment
Country Risk Rating
Business Climate Rating
- Proximity to Asia and Australia
- Touristic appeal
- Large and competitive agricultural sector
- Balanced public accounts; contained public debt
- Dynamic demographics thanks to immigration
- Quality of life
- Dependency on foreign investment
- High household and corporate debt levels (particularly in agriculture)
- Reliance on Chinese demand
- Shortages of skilled labor
- Housing shortage and housing price surge (+60% since 2008)
- Lack of R&D
Growth remains strong
Growth will slightly slow due to the stalling progression of consumption progression, the main contributor to GDP development. Although it will be supported by low interest rates, an accommodating fiscal policy, and rising real wages thanks to low and declining unemployment, consumption will suffer from high household debt (166% of income), the cooling housing market, and higher inflation. Inflation will be spurred by higher oil and import prices as a result of the New Zealand dollar’s continued depreciation. However, considering that core inflation (not including commodity prices) remains well within the inflation target range (1-3%), the central bank is unlikely to trade off growth prospects to fend off inflation in 2019: the monetary policy is very likely to remain accommodating, with a continuation of the 1.75% policy rate (a record low).
Both foreign and domestic investment growth will slow, with net FDI flows becoming negative, as a result of declining confidence and uncertainty regarding global trade and national governance. Notably, a government decision to curb immigration (by hardening the access to low-skilled work and student visas, supposedly to reduce housing price pressures) triggered fears of future shortage of workers for businesses, and was perceived as a populist policy. Furthermore, the nonetheless visible cooling of the housing market will translate into reduced construction investment.
The trade balance should be under less pressure than in 2018, as milk prices should remain higher than in 2018 throughout the year. Agricultural products (dairy and meat especially) make up the main part of exports, which leaves the performance of the external sector quite exposed to fluctuations in commodity prices and climate conditions. The slowdown in the Chinese economy, the main recipient for NZ exports, will also impact trade. The tourism sector is expected to perform well, although its contribution to growth will likely be smaller than that of goods exports.
Solid budget situation; current account imbalance
The government limits public spending to follow its budget responsibility objectives – net debt should be under 20% of GDP in 2022. Public debt will continue to decline and the budget will stay in surplus in 2019. Social spending is the main expenditure item, including income tax exemptions for those on very low incomes, as well as increases in family allowances. The country will have to find a way of dealing with an increasing deficit in its social security system (aging population). Substantial infrastructure and housing investments are also expected, notably with the ongoing reconstruction of the roads and railways damaged in the November 2016 major earthquake and the KiwiBuild Programme. Moreover tax incentives for private investment in R&D will be introduced, with the goal of bringing R&D to 2% of GDP.
The current account deficit will again worsen, but much less steeply than in 2018. The structural deficit of the income balance is linked to the outward transfer of profits by foreign firms. In 2019, the trade balance will also show a wider deficit as the import bill increases with investment-related imports, higher oil prices, and the local currency’s depreciation. It will also be under pressure due to milk prices below their long-term average (although they have increased since 2018). The balance of services, however, should remain in surplus, mainly thanks to tourism. Moreover, the financial account will also continue to show a deficit because of the repayment of external debt (above 90% of GDP, mainly household debt) and the low domestic savings rate
The coalition government carries on
In the September 2017 parliamentary elections, the conservative National Party, in office since 2008, led the vote with 56 seats out of 120, but was short of an absolute majority. Long negotiations led the centre-left Labour Party (46 seats) to form a coalition government with the support of the populist New Zealand First party and the Green Party. After over a year in office, Prime Minister Jacinda Ardern continues to enjoy high popularity rates, although delivering on promises to increase disposable income, as well as handling the housing crisis and child poverty, is challenged by a prudent fiscal stance and prospects of slowing GDP growth. The coalition does not seem at risk in 2019, although misconducts and resignation within the Labour party and the government have tarnished its image. Nevertheless, disagreements between the coalition member parties could derail the coalition, especially as the National Party remains a powerful opposition force in Parliament.
At the international level, the country will benefit from being a founding member of the CPTPP, although having the United States and China as its main trade partners spreads uncertainty in the global context of trade wars and rising protectionism.