IPREDICT LTD

2014 Election Update #2

Wednesday 22 January 2014

www.ipredict.co.nz 

Key Points:

•       Growth to be 4.8% but unemployment to remain above 5.8%

•       100 point rise in OCR expected

•       Boscawen now expected to lead Act but its future on knife-edge

•       Mana the safest of small parties and NZ First not expected back

•       Key’s probability of third term up to 58%

•       Conservative Party may be decisive

•       Mallard and Dyson now expected to seek re-election

Commentary:

John Key’s odds of a third term have improved marginally this week, with a 58% probability there will be a National prime minister after the election.  However, with National and Labour/Green in a dead heat, Mr Key’s prospects of a third term depend on small parties, particularly the Conservative Party.  The election will take take place with economic growth approaching 4.8% but with unemployment remaining above 5.8%.  Among the small parties, Mana is in the strongest position in terms of confidence it can win an electorate seat while Winston Peters’ NZ First continues not to be expected back.  Act is also vulnerable – John Boscawen is now favoured to lead the party, with David Seymour favoured as its Epsom candidate, but it has only a 50% chance of winning the pivotal seat.

Economic Context

As reported last week, growth is expected to be strong during the year.  iPredict’s first quarterly projections are that growth will have been 1.01% in the December 2013 quarter, and will be 1.18% in the March 2014 quarter, 1.19% in the June quarter, 1.16% in the September quarter, and 1.21% in the December quarter.  Annual growth in the 2014 calendar year is forecast to be 4.8%.

Falls in unemployment are expected to be more modest.  Unemployment is expected to have been below 6.03% in the December 2014 quarter and to fall to 5.92% in the March 2014 quarter, 5.88% in the June quarter, 5.85% in the September quarter and 5.83% in the December quarter.

The annual current account deficit is expected to have been 3.6% of GDP in the December 2013 quarter and to be 3.5% in the March 2014 quarter, 3.6% in the June quarter, 4.0% in the September quarter and 3.9% in theDecember quarter.

There is now an 85.8% probability there will be a fiscal surplus in 2014/15.  The fiscal surplus is expected to be 0.56% of GDP in 2014/15 and rise to 0.83% of GDP in 2015/16.  Stocks forecasting the 2016/17 fiscal surplus will be launched today.

Annual inflation is expected to remain around the Reserve Bank’s 2% target midpoint through 2014 and within the 1-3% band.  Annual inflation to the end of the March quarter is expected to be 1.62%, rising to 1.91% in the June quarter, 2.02% in the September quarter and 2.11% in the December quarter.

The inflation forecasts need to be seen in the context of rising interest rates.  There is a 98.9% probability the Reserve Bank will raise the Official Cash Rate (OCR) in 2014.  Despite higher-than-expected December 2013 inflation data, there is still a 67.6% probability the OCR will not be changed on 30 January but a 70.4% probability it will be raised by 25 basis points on 13 March.  A further 25 point rise is expected in either April or June and by30 October the OCR is forecast to be 100 basis points higher than it is now.

There is an 89.9% probability the Reserve Bank’s restrictions on high loan-to-value ratio mortgages will stay in place through 2014.

Election Date & Personnel

There continues to be an 80% probability the election will be held in the fourth quarter of 2014, and a 62% probability it will be held in November, up from 55% a week ago.  All current party leaders, except for retiring Act leader John Banks and retiring Maori Party co-leader Tariana Turia are overwhelmingly expected to remain in their roles until nomination day. 

There has been a change in forecast for the leadership of the Act Party.  John Boscawen now has a 55% probability of becoming leader ahead of Jamie Whyte on 45%.  There is less clarity on who Act’s Epsom candidate will be, with David Seymour favoured but with only 45% probability.

In the highly unlikely event there were a change in leader of either the National or Labour parties, Judith Collinsand Grant Robertson are favourites to take the role in their party, with 37% and 47% probability respectively.  Contrary to market prices last week, Labour’s Ruth Dyson and Trevor Mallard are now both expected to seek re-election.  The probability Murray McCully will retire has eased back from 47% last week to 43% this week.

Party Vote

There have been only small changes in forecast party vote shares over the last week.  Of the major parties, National is expected to win 42.96% of the party vote, Labour 34.07% and the Green Party 9.29%.

No other parties are expected to reach the 5% threshold under the MMP electoral system.  The Conservative Party is expected to win 4.53%, NZ First 4.33%, Act 1.87%, the Maori Party 1.38%, Mana 0.69, UnitedFuture 0.59% and the Aotearoa Legalise Cannabis Party 0.30%.  Stocks for the proposed Civilian and Kim Dotcom parties will be launched in the near future.

Electorate Contests

Contract bundles for every electorate will be launched progressively through the year.  Of the small parties, Manaand UnitedFuture are most likely to win a seat, each having an 80.2% probability of winning at least one seat, followed by the Conservatives on 64.6% probability and the Maori Party on 61.5%.  Act has just a 50% probability of winning an electorate seat.

In terms of expected electorate MP representation, only Mana has a value above one, being expected to have 1.05 electorate MPs.  The Maori Party has expected electorate representation of 0.85 MPs, UnitedFuture 0.84 MPs, the Conservatives 0.65 MPs and Act 0.59 MPs.

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

Election Result & Alternative Scenarios

Based on the party vote forecasts and the electorate results above (including an assumption that Act were to win one electorate seat) Parliament would be as follows: National 54 MPs, Labour 42 MPs, the Greens 12 MPs, the Conservatives 6 MPs, Act 2 MPs, the Maori Party 2 MPs, UnitedFuture 1 MP and Mana 1 MP, for a total of 120 MPs.  A government would be required to have the support of 61 MPs on confidence and supply.

Under this scenario, both National and Labour/Green would have 54 MPs and would require the support of other parties to form a government.

The current National/Maori Party/Act/UnitedFuture governing arrangement would have only 59 MPs and could not form a new government.  However, National could form a government with the Conservative Party and one or more of the Maori Party, Act and UnitedFuture parties.

A government comprising Labour, the Greens and the Conservative Party, and one of UnitedFuture or Mana, would also be a theoretical possibility with 61 MPs.

Because of the political vulnerability of the Act Party, iPredict has also calculated what would happen were the party not to win an electorate seat.  Under this scenario, Parliament would be as follows: National 55 MPs, Labour 43 MPs, the Greens 12 MPs, the Conservatives 6 MPs, the Maori Party 2 MPs, and Mana and UnitedFuture 1 MP each.  National and Labour/Green would again be tied, this time on 55 MPs, each with minor parties deciding the government.  National and the Conservative Party could govern with the support of UnitedFuture, as could a Labour/Green/Conservative arrangement with or without the UnitedFuture or Mana parties.

iPredict has also examined what would happen were the next two most vulnerable minor parties, the Conservatives and the Maori Party, to miss out on electorate seats.  Under this scenario, Parliament would be as follows: National 59 MPs, Labour 46 MPs, the Greens 13 MPs, and UnitedFuture and Mana 1 MP each.  With prime minister John Key having ruled out working with the Labour, Green or Mana parties, National could not govern but nor could Labour/Green/Mana.  Only a Labour/Green/Mana/UnitedFuture arrangement would be possible to avoid new elections.

Overall, the market indicates that National has this week marginally improved its very narrow advantage over Labour to lead the next government.  There is now a 58.3% probability of a National prime minister after the next election (up from 53.3% last week) and a 41.7% probability of a Labour prime minister (down from 45.1%).

Miscellaneous

iPredict Ltd is owned by Victoria University of Wellington.  Details on the company and its stocks can be found atwww.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 10.37 am today.

ENDS

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