IPREDICT LTD

2014 ELECTION UPDATE #14

Monday 14 April 2014

www.ipredict.co.nz

Key Points:

• Labour makes gains over last week

• National’s probability of forming next government down to 70%, compared with 87% five months before 2011 election

• Likelihood NZ First would back Labour-led government passes 50% for first time

• Act’s chances of winning Epsom fall to 60%

• Conservatives’ probability of winning a seat falls to 31%

• Successful Mana-Internet deal would deliver 2 list MPs on Harawira’s kowowai

• Hamilton East and West Coast-Tasman now marginal

• Interest rate expectations rise and inflation not expected to go above 2% in 2014

• Growth and fiscal surplus forecasts ease slightly

• Fourth in line to become NZ Head of State expected to be conceived in 2014

Commentary:

National’s chances of leading the next government have eased from 74% to 70% over the last week, compared with 87% at the same point in the 2011 election cycle, according to the combined wisdom of the 7000 registered traders on New Zealand’s online predictions market, iPredict. National’s weakened position appears to be driven by a small drop in its forecast party vote, Epsom becoming ever-closer between National and Act, the probability of the Conservative Party winning a seat continuing to fall and the prospects of a Mana-Internet Party deal. Meanwhile, inflation is no longer expected to break the 2% midpoint target in 2014 as interest-rate expectations rise and forecasts for GDP growth and the 2014/15 fiscal surplus ease marginally.

Economic Context

Growth expectations have eased fractionally this week. Growth in the March 2014 quarter is expected to be 1.0% (down from 1.1% last week), in the June quarter 1.1% (steady), in the September quarter 1.2% (steady) and December quarter 1.1% (steady). Forecast annual growth for 2014 remains unchanged at 4.5%.

There have been no changes to unemployment expectations. Unemployment is expected to be 5.8% in the March 2014 quarter (steady compared with last week), 5.6% in the June quarter (steady), 5.4% in the September quarter (steady) and 5.5% in the December quarter (steady).

Forecasts for New Zealand’s current account deficit are again unchanged at 3.0% for the March 2014 quarter, 3.5% in the June quarter, 4.0% in the September quarter and 4.0% in the December quarter.

The probability of a fiscal surplus in 2014/15 is down to 94% from 95% last week, following last week’s announcement of lower-than-expected February 2014 tax receipts. The surplus forecast for 2014/15 is now down to 0.50% of GDP, from 0.53% last week and 0.62% the week before. The 2015/16 surplus is expected to be 0.93% of GDP and 2.0% of GDP for 2016/17 (both steady).

Inflationary expectations have fallen marginally this week, with annual inflation expected to remain below the Reserve Bank’s 2% target midpoint through 2014 for the first time. Annual inflation to the end of the March quarter is expected to be 1.6% (steady compared with last week) and will rise to 1.8% in the June quarter (steady), 1.7% in the September quarter (down from 1.8%) and 1.9% in theDecember quarter (down from 2.1%).

The market is forecasting a further 25 basis point increase at the next OCR Review on 24 April, with 92.2% probability, up from 81.3% last week. Compared with the rate of 2.5% at the start of the year, the market is pricing that the OCR will be up 48 basis points in April (up from 45 last week), 67 in June (up from 64), 83 in July (up from 77), 95 in September (up from 89), 106 in October (up from 98) and 118 in December (up from 110).

Other Issues

The market continues to believe there is only an 8% probability that a New Zealand citizen will be Head of State by 2020. There continues to be a 78% probability that Charles, Prince of Wales, will be Head of State by 2020. There is a 53% probability Catherine, Duchess of Cambridge, will become pregnant in 2014 with a child who will become 4th in line to be New Zealand’s Head of State.

New Zealand’s chances of being elected to the UN Security Council for 2015-16 have remained steady at 43%, as has the probability New Zealand will sign a Free Trade Agreement with South Koreabefore 1 December 2014, at 47%.

The probability the US Congress will ratify the yet-to-be-signed Trans Pacific Partnership (TPP) agreement before 1 July 2015 remains steady at 2.5%, and there remains just a 37.8% probability a deal will be ratified by the US Congress by 1 July 2017.

Party Vote

All current party leaders, except for Maori Party co-leader Tariana Turia, are strongly expected to remain in their roles until nomination day with at least 95% probability. The party vote turnout is expected to be 74.7% (steady compared with last week), marginally up from the 74.2% turnout in 2011.

Of major parties, National is expected to win 43.87% of the party vote, down from from 44.46% last week. Labour has risen slightly to 30.51%, up from 30.17% last week, while the Green Party’s expected vote is down slightly to 10.17%, from 10.49% last week.

Of smaller parties, NZ First is up fractionally to 5.42% from 5.36% last week. The Conservative Party’s forecast party vote is down slightly to 3.61%, from 3.67% last week, and is still short of the 5% threshold required for parliamentary representation unless it wins an electorate seat. Act is on 1.81% compared with 1.79% last week and UnitedFuture is steady on 0.60%.

Mana is on 1.10% (down from 1.19% last week), the Maori Party on 1.10% (up from 1.09%) the Internet Party on 1.51% (up from 0.89%) and Aotearoa Legalise Cannabis Party on 0.30% (steady).

Electorate Contests

The Conservative Party’s probability of winning at least one seat is down to 31% from 34% last week, and its expected representation is just 0.27 MPs (down from 0.37 last week). The Conservatives are not expected to win any specific electorate, with just a 20% probability of winning East Coast Bays (up from 16% last week), a 12% probability of winning Upper Harbour (down from 14% last week), and a 12% probability of winning Rodney (steady).

Act’s probability of winning at least one electorate seat is down to 62% (from 65% last week) and its expected electorate representation is down to 0.60 MPs, from 0.67 last week. It has a 60% probability of winning Epsom (down from 65% last week).

UnitedFuture continues to have an 81% probability of winning at least one seat (steady) and has expected electorate MP representation of 0.80 MPs (down from 0.84 last week). Its probability of winning Peter Dunne’s Ohariu electorate remains 80% (steady).

In the Maori electorates, Mana has an 85% probability of winning at least one seat (up from 83% last week) and the Maori Party a 66% probability of winning at least one seat (down from 72%). Mana’s expected electorate representation has fallen to 1.08 MPs, from 1.16 last week and the Maori Party’s expected electorate representation is down to 0.76 MPs, from 0.89 last week.

Mana appears most likely to retain the Te Tai Tokerau electorate, with 82% probability leader Hone Harawira will win the seat (steady). In Waiariki, Maori Party Leader Te Ururoa Flavell has a 65% probability of winning, down from 69% last week. The probability the Maori Party will retain Tariana Turia’s Te Hauauru electorate has fallen to 14% from 20% last week. Pita Sharples’ Tamaki Makaurau electorate remains safe for Labour with 90% probability it will be won by that party.

The Greens and NZ First continue not to be expected to win electorate seats.

National’s David Bennett may be in trouble in Hamilton East, which is now the most marginal electorate in the country other than Epsom mentioned above. Mr Bennett has only a 62% chance of retaining his seat ahead of his Labour challenger, Cliff Allen.

The four other most marginal seats other than those mentioned above are Rotorua, Waimakariri, Napier, Wairarapa and West Coast-Tasman. In Rotorua, National’s Todd McClay now has a 71% of retaining his seat against challenger Tamati Coffey, down from 73% last week. Labour’s Clayton Cosgrove has a 71% probability of taking Waimakariri from National (steady) and Labour’s Stuart Nash now has a 75% probability (up from 67% last week) of taking Napier from National. In Wairarapa, National has a 75% of holding the seat (down from 77% last week) and Labour has a 75% probability of holding on to West Coast-Tasman.

Election Result & Alternative Scenarios

Based on the party vote forecasts and the electorate results above, Parliament would be as follows: National 56 MPs (down from 57 last week), Labour 39 MPs (up from 38), the Greens 13 MPs (steady), NZ First 7 MPs (steady), Act 2 MPs (steady), and Mana, the Maori Party and UnitedFuture 1 MP each. Parliament would have 120 MPs and a government would be required to have the support of 61 MPs on confidence and supply.

Under this scenario, the current National/Maori Party/Act/UnitedFuture governing arrangement would have only 60 seats and could not form a government. Nor could Labour/Green/Mana/NZ First which would also have only 50 seats. A five-party Labour/Green/Mana/NZ First/Maori Party government would be possible with 61 seats as would a two-party National/NZ First government with 63 seats.

In light of speculation about a Mana/Internet Party arrangement, iPredict has also modelled what would happen if the parties merged for the purposes of the party vote and maintained their combined forecast party vote of 2.61%. Under such a scenario, National would have 55 seats, Labour 38, the Greens 13, NZ First 7, Mana/Internet 3, Act 2 and the Maori Party and UnitedFuture 1 each. Parliament would have 120 MPs and a government would be required to have the support of 61 MPs on confidence and supply.

Under this scenario, NZ First would clearly have the balance of power. The current National/Maori Party/Act/UnitedFuture governing arrangement would have only 59 MPs and a Labour/Green/Mana-Internet combination 54 MPs. However, a Labour/Green/Mana-Internet/NZ First government would have 61 MPs and a National/NZ First government 62 MPs.

Should Winston Peters have the balance of power after the election, iPredict’s bundle of stocks forecasting NZ First’s decision-making indicates for the first time he would choose Labour. There is a 51% probability he would give confidence and supply to Labour, a 24% probability he would give confidence and supply to National and a 24% probability he would give confidence and supply to neither, which would allow the National bloc to govern.

Overall, National now has just a 70% probability of leading the next government, down from 74% over the last two weeks. Five months before the 2011 election, National had an 87% chance of being re-elected.

Post Election Developments

The market continues to indicate a 71% probability that David Cunliffe will depart as leader of the Labour Party by the end of 2015 (steady compared with last week). There is a 77% chance he will depart by the end of 2016 and an 84% probability he will step down by the end of 2017 (both steady).

Grant Robertson continues to be favoured to be next Labour leader, with 52% probability (steady compared with last week), followed by Shane Jones with 22% probability (up from 20%), Jacinda Ardern with 11% probability (steady) and Andrew Little with 9% probability (steady).

In National, there is a 36% probability John Key will depart as leader before the end of 2015 (steady), a 61% probability he will depart by the end of 2016 (up from 60%) and a 78% probability he will depart by the end of 2017 (steady).

Steven Joyce remains the favourite to succeed Mr Key as National Party leader, with 35% probability (steady) compared with last week), followed by Judith Collins on 31% probability (up from 30%) and Simon Bridges on 13% probability (steady).

Labour’s chances of winning the 2017 election have improved to 53% this week compared with 50% last week.

Miscellaneous

iPredict Ltd is owned by Victoria University of Wellington. Details on the company and its stocks can be found at www.ipredict.co.nz. The weekly political update is prepared by Exceltium Ltd on a pro bono basis and is based on a snapshot taken at a random time each week. This week’s was taken at 12.36 pm today.

ENDS

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