iPredict 2014 Election Update #5: NZ First has balance of power

Key Points:

• Unemployment and fiscal outlooks improve

• Security Council seat less than 50% likely

• Genesis sure to be floated by year’s end

• Conservatives to miss out on electorate and 5% threshold

• Mana and Maori Party make gains

• NZ First above 5% for first time and would hold balance of power – expected to back or acquiesce to a third-term National-led government

Commentary:

For the first time, iPredict’s more than 7000 registered traders are forecasting that Winston Peters’ NZ First Party will reach the 5% threshold and hold the balance of power after this year’s election, expected in October. Mr Peters’ party will then either actively back or at least acquiesce to a third-term National-led government. The Conservative Party’s woes continue, with the Colin Craig-led party now not expected to win an electorate seat or reach the 5% threshold. Mana, the Maori Party, UnitedFuture and Act all look safe for a return to parliament after an election campaign fought amid strong economic growth, falling unemployment, an improving fiscal position, rising interest rates, the sale of shares in Genesis Energy and a failed New Zealand campaign to gain a seat on the UN Security Council.

Economic Context

Growth expectations continue to be broadly stable. The market expects that growth will have been 1.04% in the December 2013 quarter (up from 1.02% last week). In 2014, growth is now expected to be 1.17% in the March 2014 quarter (steady), 1.18% in the June quarter (steady), 1.15% in the September quarter (steady) and 1.18% in the December quarter (down from 1.21%). Annual growth in the 2014 calendar year is now forecast to be 4.76% (down from 4.79% last week).

Expectations for the unemployment rate have improved again. Unemployment is now expected to be 5.79% in the March 2014 quarter (down from 5.84% last week), 5.68% in the June quarter (down from 5.84%), 5.59% in theSeptember quarter (down from 5.85%) and 5.53% in the December quarter (down from 5.83%).

Current account deficit expectations are essentially unchanged. The current account deficit is now expected to have been 3.32% of GDP in the December 2013 quarter (down from 3.36% last week), and to be 3.43% in theMarch 2014 quarter (steady), 3.60% in the June quarter (steady), 4.01% in the September quarter (steady) and 4.00% in the December quarter (steady).

Expectations for a fiscal surplus in 2014/15 have improved markedly, to 85.0% from 79.8% last week and 77.8% two weeks ago. The surplus in 2014/15 is now expected to be 0.50% of GDP, up from 0.38% last week. The surplus forecast for 2015/16 is up to 0.92% (up from 0.82% last week) and 2.0% of GDP for 2016/17.

Inflationary expectations continue to be stable with annual inflation expected to remain around the Reserve Bank’s 2% target midpoint and within the 1-3% band. Annual inflation to the end of the March quarter is expected to be 1.58% and will rise to 1.92% in the June quarter, 2.10% in the September quarter and 2.10% in the December quarter.

The market continues to indicate a 98.9% probability the Reserve Bank will raise the Official Cash Rate (OCR) in 2014. The probability it will be raised on 13 March is now up to 95.1%, from 91.5% last week, 81.3% the week before and 70.4% three weeks ago. A further 25-point rise is expected in either April or June. By 30 October, the OCR is forecast to be 100 basis points higher than it is now. There is a 47.5% probability of a further 25-point rise on 11 December. Overall, market pricing continues to indicate an increase of 103 points in 2014.

There continues to be a 92.4% probability the Reserve Bank’s restrictions on high loan-to-value ratio mortgages will stay in place through 2014 (up from 90.0% last week).

Other Issues

New Zealand has only a 48.3% probability of being elected to the UN Security Council for 2015-16 but a 53.3% probability of signing a Free Trade Agreement with South Korea before 1 December 2014. The market indicates only a 40.1% probability the US Congress will ratify the yet-to-be-signed Trans Pacific Partnership (TPP) agreement before 1 July 2015. There is a 93.5% probability Genesis Energy will be floated on the NZX before 1 January 2015 but just an 18.2% probability the Parental Leave and Employment Protection (Six Months Paid Leave) Amendment Bill will receive the Royal Assent by year’s end.

Election Date & Personnel

Sentiment continues to firm in favour of October as the month for the election. There is now a 60% probability the election will be held in October (up from 50% last week), a 23% probability it will be held in September (down from 31% last week) and a 17% probability it will be held in November (up from 14% last week).

All current party leaders, except for Maori Party co-leader Tariana Turia are overwhelmingly expected to remain in their roles until nomination day. In the highly unlikely event there were a change in leader of either the National or Labour parties, Judith Collins and Grant Robertson continue to be favourites, steady on 39% and 52% probability respectively.

Party Vote

A party vote turnout of 77.2% continues to be expected compared with 74.2% in 2011.

Labour and NZ First have made gains at the expense of National, the Greens and other small parties. Of the major parties, National is expected to win 42.02% of the party vote (down from 42.26% last week), Labour 34.03% (up from 32.94%) and the Green Party 9.08% (down from 9.42%).

Of smaller parties, NZ First is now expected to reach the 5% threshold under the MMP electoral system. It is expected to win 5.07% of the party vote (up from 4.73% last week), while the Conservative Party is picked to win 4.02% (down from 4.14%), Act 2.30% (down from 2.46%), the Maori Party 1.24% (down from 1.28%), the Internet Party 0.81% (down from 1.28%), Mana 0.48% (down from 0.49%), UnitedFuture 0.48% (down from 0.49%), theAotearoa Legalise Cannabis Party 0.29% (down from 0.30%), the Civilian Party 0.1% (steady) and Democrats for Social Credit 0.1% (steady).

Electorate Contests

On the electorate front, the news continues to worsen for the Conservative Party. The party now has only a 48.2% probability of winning at least one electorate seat, down from 53.3% last week, 61.5% the week before and 64.6% three weeks ago. The party has expected representation of just 0.51 electorate MPs, compared with 0.55 electorate MPs last week, 0.63 MPs the week before and 0.65 three weeks ago. Of electorate bundles launched so far, the Conservatives are not expected to win any specific electorate, with just a 25% probability of winning East Coast Bays (down from 28% last week) and an 8% probability of winning Upper Harbour (up from 5% last week).

Of other small parties, Mana and the Maori Party have made gains with the latter overtaking UnitedFuture as the second most likely small party to win an electorate seat. Mana now has a 90.9% probability of winning at least one seat (up from 83.2% last week and 73.1% the week before) and the Maori Party an 81.3% probability of winning at least one seat (up from 72.0% last week and 67.5% the week before). Both Maori-orientated parties now have expected electorate MP representation of above one, with Mana expected to have 1.14 electorate MPs (up from 1.06 last week) and the Maori Party 1.05 electorate MPs (up from 0.89 last week). Mana has an 89.1% probability of winning Te Tai Tokerau and the Maori Party an 80.0% probability of winning Waiariki.

Act has again gained marginally and now has a 78.0% probability of winning at least one electorate seat (up from 74.4% last week), expected electorate representation of 0.78 MPs (up from 0.77 last week) and a 73.1% probability of winning Epsom.

UnitedFuture is broadly steady with a 79.1% probability of winning at least one electorate seat (down from 80.2% last week), expected electorate MP representation of 0.79 MPs (steady) and a 76.9% probability of winningOhariu.

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

Contract bundles for every electorate will be launched progressively through the year.

Election Result & Alternative Scenarios

Based on the party vote forecasts and the electorate results above, Parliament would be as follows: National 53 MPs (down from 54 last week), Labour 43 MPs (up from 42), the Greens 11 MPs (down from 12), NZ First 6 MPs (up from 0), Act 3 MPs (steady), the Maori Party 2 MPs (steady), UnitedFuture 1 MP (steady), Mana 1 MP (steady) and the Conservatives 0 MPs (down from 5). 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, Labour/Green would have 54 MPs and National 53 MPs requiring either to have the support of other parties to form a government.

The current National/Maori Party/Act/UnitedFuture arrangement would have 59 MPs and could not govern. Nor could a Labour/Green/Maori Party/Mana arrangement, with or without UnitedFuture. This means that NZ First would hold the balance of power.

A bundle of iPredict stocks forecast NZ First’s decision-making after the election but are inconclusive. Analysis of current prices, in the event NZ First was returned to parliament and held the balance of power, indicate a 48.1% probability it would back Labour on confidence and supply. However, the market indicates a 36.7% probability it would back National on confidence and supply, a 7.7% probability it would give no one confidence and supply, and a 7.5% probability that “other” would occur.

Overall, however, the market continues to forecast a National-led government, with a 62.0% probability of a National prime minister after the election, up from 61.5% last week.

Labour continues to be favoured to win the 2017 election.

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 3.02 pm today.

ENDS

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