iPredict Ltd 2014 Election Update #6

Tuesday 18 February 2014

www.ipredict.co.nz

Key Points:

• Saturday 18 October picked for election

• Expectations for OCR rises ease marginally

• National and Greens gain at expense of Labour, Conservatives, Act and Internet Party

• NZ First picked to hold balance of power and National still favoured for third term

• Key and Cunliffe to depart before 2017 election

• Robertson clearly ahead of Ardern and Jones for next Labour leader

• Tighter leadership race in National, with Collins favoured ahead of Joyce and Bridges

Commentary:

Trading by iPredict’s more than 7000 registered traders indicates a 45% probability this year’s election will be held on Saturday 18 October, with Saturday 20 September and Saturday 1 November the runners up. Expectations for increases in the Official Cash Rate have eased marginally, with the market pricing increases of 107.5 basis points through to the end of the year, down from 111.5 last week. Mana, the Maori Party, Act and UnitedFuture all continue to be expected to win electorate seats, with the Conservative Party missing out, while NZ First continues to be expected to beat the 5% threshold to be returned to parliament and hold the balance of power. National’s John Key is expected to win a third term as prime minister but both he and Labour’s David Cunliffe have a 70% probability of stepping down as leader of their party by the end of 2016, to be replaced by Judith Collins and Grant Robertson respectively.

Economic Context

Growth expectations have moved up marginally this week. The market expects that Statistics New Zealand will report on 20 March that growth was 1.01% in the December 2013 quarter (down from 1.04% last week). In 2014, growth is expected to be 1.17% in the March 2014 quarter (steady), 1.18% in the June quarter (steady), 1.18% in the September quarter (up from 1.15%) and 1.26% in the December quarter (up from 1.18%). Annual growth in the 2014 calendar year is now forecast to be 4.87% (up from 4.76% last week).

Expectations for the unemployment rate have remained broadly stable. Unemployment is now expected to be 5.82% in the March 2014 quarter (up from 5.79% last week), 5.68% in the June quarter (steady), 5.59% in the September quarter(steady) and 5.49% in the December quarter (down from 5.53%).

Current account deficit expectations are broadly unchanged. The current account deficit is now expected to have been 3.32% of GDP in the December 2013 quarter (steady compared with last week), and to be 3.37% in the March 2014 quarter (down from 3.43%), 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 remained steady at 85.0%. The surplus in 2014/15 is now expected to be 0.48% of GDP, down from 0.50% last week. The surplus forecast for 2015/16 is up to 0.82% of GDP (down from 0.92% last week) and 2.0% of GDP for 2016/17 (steady).

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 (all steady compared with last week).

Interest rate expectations have eased somewhat this week. 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 94.7% (down from 95.1% last week). Compared with the current rate of 2.50%, the market is pricing that the OCR will be up 40.3 basis points in April (down from 44.7 last week), 59.6 in June (down from 65.3), 73.0 in July (down from 77.3), 85.4 inSeptember (down from 89.7), 95.4 in October (down from 99.4) and 107.5 in December (down from 111.5).

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.

Other Issues

Confidence that New Zealand will be elected to the UN Security Council for 2015-16 is up to 55.0%, compared with 48.3% last week. There continues to be a 53.3% probability New Zealand will sign a Free Trade Agreement with South Koreabefore 1 December 2014. The probability the US Congress will ratify the yet-to-be-signed Trans Pacific Partnership (TPP) agreement before 1 July 2015 is down to 37.8% from 40.1% last week. There continues to be a 93.5% probability Genesis Energy will be floated on the NZX before 1 January 2015 but just an 19.8% probability the Parental Leave and Employment Protection (Six Months Paid Leave) Amendment Bill will receive the Royal Assent by year’s end (up from 18.2% last week).

Election Date & Personnel

Saturday 18 October is favoured for the election date with 45% probability, followed by Saturday 20 September (21.4% probability), Saturday 1 November (19.8% probability) and Saturday 27 September (10.0% probability). All current party leaders, except for Maori Party co-leader Tariana Turia, are strongly expected to remain in their roles until nomination day.

Party Vote

A party vote turnout of 75.0% is forecast (down from 77.2% last week), compared with 74.2% in 2011.

National and the Greens have made gains this week at the expense of Labour, the Conservatives, Act and the proposed Internet Party. Of the major parties, National is expected to win 43.33% of the party vote (up from 42.02% last week),Labour 32.57% (down from 34.03%) and the Green Party 9.76% (up from 9.08%).

Of smaller parties, NZ First continues to be expected to reach the 5% threshold under the MMP electoral system. It is expected to win 5.06% of the party vote (down from 5.07% last week), while the Conservative Party is picked to win 3.82% (down from 4.02%), Act 2.10% (down from 2.30%), the Maori Party 1.24% (steady) the Internet Party 0.69% (down from 0.81%), Mana 0.48% (steady), UnitedFuture 0.48% (steady), the Aotearoa Legalise Cannabis Party 0.29% (steady), the Civilian Party 0.1% (steady) and Democrats for Social Credit 0.1% (steady).

Electorate Contests

Mana and the Maori Party continue to be the safest of the smaller parties in terms of retaining electorate representation. Mana continues to have a 90.9% probability of winning at least one seat and the Maori Party has an 83.2% probability of winning at least one seat (up from 81.3% probability last week). Both Maori-orientated parties now have expected electorate MP representation of 1.14 electorate MPs (steady in the case of Mana and up from 1.05 MPs for the Maori Party). Mana has a 90.0% probability of winning Hone Harawira’s Te Tai Tokerau electorate (up from 89.1% last week) and the Maori Party an 80.0% probability of winning Te Uruoa Flavell’s Waiariki (steady). Labour is favoured to win Tariana Turia’s Te Hauauru electorate, with 71.1% probability.

UnitedFuture and Act also look fairly secure. UnitedFuture continues to have 79.1% probability of winning at least one electorate seat and has expected electorate MP representation of 0.79 MPs. Its probability of winning Peter Dunne’sOhariu electorate is 75.0% (down from 76.9% last week). Act continues to have a 78.0% probability of winning at least one electorate seat and has expected electorate representation of 0.78 MPs. It now has a 75.0% probability of winningEpsom, up from 73.1% last week.

There has been a marginal improvement for the Conservative Party this week, although it still looks likely to miss out on an electorate seat. The party now has a 48.3% probability of winning at least one electorate seat, up from 48.2% last week and expected representation of 0.53 electorate MPs, up from 0.51 last week. Of electorate bundles launched so far, the Conservatives are not expected to win any specific electorate, with just a 19.8% probability of winning East Coast Bays (down from 25% last week and 28% the week before) and 11.9% probability of winning Upper Harbour (up from 8% last week and 5% the week before).

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 54 MPs (up from 53 last week), Labour 41 MPs (down from 43), the Greens 12 MPs (up from 11), NZ First 6 MPs (steady), Act 3 MPs (steady), the Maori Party 2 MPs (steady), UnitedFuture 1 MP (steady) and Mana 1 MP (steady). 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, National/Act would have 57 MPs and Labour/Green/Mana 54 MPs requiring either group to have the support of other parties to form a government. The current National/Maori Party/Act/UnitedFuture arrangement would have 60 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.

iPredict’s bundle of stocks forecasting NZ First’s decision-making after the election continues to be inconclusive. Analysis of current prices, in the event NZ First was returned to parliament and held the balance of power, indicate a 45.3% probability it would back Labour on confidence and supply (down from 48.1% last week) and a 35.8% probability it would National on confidence and supply (down from 36.7% last week). However, the market also indicates a 9.4% probability (up from 7.7% last week) that NZ First would give nobody confidence and supply, which would favour the larger bloc, and a 9.4% probability (up from 7.5% last week) that some other unexpected event could occur.

Overall, the market continues to forecast a National-led government, with 61.5% probability, down from 62.0% last week.

Post Election Developments

The market indicates a 59% probability that David Cunliffe will depart as leader of the Labour Party and a 51% probability that John Key will depart as leader of the National Party before the end of 2015. Each has a 70% probability they will be gone by the end of 2016.

Within Labour, Grant Robertson is favoured to be the next leader, with 50.0% probability, ahead of Jacinda Ardern (14.2% probability) and Shane Jones (11.9%).

Within National the race would be tighter. Judith Collins is favoured with 30.0% probability, ahead of Steven Joyce (25.7% probability) and Simon Bridges (14.0% probability).

Labour continues to be marginally favoured to win the 2017 election with 53.3% probability.

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 4.49 am today.

ENDS

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