ipredict Ltd

2014 Election Update #26

Monday 14 July 2014

www.ipredict.co.nz

Key Points:

• Labour’s probability of leading next government continues to recover as Greens make further gains

• Fiscal outlook weakens and inflationary expectations edge up

• NZ’s Security Council odds improve

• Tamaki-Makaurau back in play

• GDP stocks for March 2015, June 2015, September 2015 and December 2015 quarters now open

• Inflation stocks for March 2015, June 2015, September 2015 and December 2015 quarters now open

Commentary:

The Green Party continues to make gains, according to the combined wisdom of iPredict’s 7000 registered traders, helping Labour to continue to improve its chances of leading the next government. At the same time, New Zealand’s fiscal outlook has weakened somewhat, inflationary expectations have edged up and the country’s chances of winning a place on the UN Security Council have improved. Tamaki-Makaurau, which has looked safe for Labour for most of the year, is again in play at this year’s general election, to be held on 20 September.

Economic Context

Growth expectations remain largely unchanged this week. Growth in the June quarter is still expected to be 1.0% (steady compared with last week), 1.0% in the September quarter (steady) and 1.1% in the December quarter (steady). Forecast annual growth for 2014 has increased marginally to 4.2% (up from 4.1% last week).

Stocks forecasting growth in the March 2015, June 2015, September 2015 and December 2015 quarters are now open for trading.

Unemployment expectations are again unchanged this week. Unemployment is expected to be 5.7% in the June quarter (steady compared with last week), 5.5% in the September quarter (steady) and 5.5% in the December quarter (steady).

Forecasts for the current account deficit are also unchanged this week. The forecast deficit for the June quarter is now 3.0% (steady compared with last week), 3.7% in the September quarter (steady) and 4.0% in the December quarter(steady).

The probability of a fiscal surplus in 2014/15 has slipped again this week, and is now 76%, compared with 84% last week and 86% the week before. The surplus forecast for 2014/15 is now 0.37% of GDP, down from 0.42% last week and 0.43% the week before. The forecast for the 2015/16 surplus is steady at 1.0% of GDP, as is the forecast surplus for 2016/17 at 2.0% of GDP. The opening forecast for the 2017/18 surplus is 2.4% of GDP.

Inflationary expectations have risen this week but continue to remain below the Reserve Bank’s 2% target midpoint through 2014. Annual inflation to the end of the June quarter is expected to be 1.8% (up from 1.7% last week), 1.7% in theSeptember quarter (up from 1.6%) and 1.8% in the December quarter (steady).

Stocks forecasting inflation in the March 2015, June 2015, September 2015 and December 2015 quarters are now open for trading.

Interest rate expectations are broadly stable this week. The market is forecasting an 85% probability that the Reserve Bank will increase the Official Cash Rate by a further 25 basis points at its next review on 24 July (up from 79% last week). Compared with the rate of 2.5% at the start of 2014, the market is pricing that the OCR will be up 96 basis points in July (up from 95 last week), 104 in September (up from 103), 115 in October (up from 114), 125 in December (up from 124), 130 in January 2015 (steady) and 146 in March 2015 (steady).

Stocks forecasting OCR decisions in April 2015 and June 2015 are now open for trading.

Foreign Affairs & Trade

New Zealand’s chances of being elected to the UN Security Council for 2015-16 have recovered significantly to 43% (up from 26% last week and 23% the week before). The probability Helen Clark will be appointed the next UN Secretary General is down to 14% from 21% the last two weeks. The probability New Zealand will sign a Free Trade Agreement with South Korea before 1 December 2014 is down to 22% from 26% last week. The probability the US Congress will ratify the yet-to-be-signed Trans Pacific Partnership (TPP) agreement before 1 July 2015 is steady at 11%, as is the probability of ratification by 1 July 2017 at 35%. There is a 5% probability that Secretary of Foreign Affairs John Allen will depart from his role before September 2014 (up from 0% last week).

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 now expected to be 74.7% (up from 74.1% last week) and above the 74.2% turnout in 2011.

Of major parties, National is expected to win 43.5% of the party vote (down from 44.1% last week). Labour is on 28.5% (down from 28.6% last week) but the Green Party is up to 12.8%, from 12.1% last week, 11.5% the week before and 10.3% three weeks ago.

Of smaller parties, NZ First’s expected party vote is up to 5.6% from 5.2% last week. The Conservative Party has slipped slightly to 3.9% (from 4.0% last week) and is still short of the 5% threshold required for parliamentary representation unless it wins an electorate seat. Act is down to 2.0% (from 2.1% last week) while UnitedFuture is up to 0.5% (from 0.4% last week). Amongst other smaller parties, the Internet Mana alliance is down to 1.9% (from 2.1% last week), theMaori Party is on 0.9% (steady), and the Aotearoa Legalise Cannabis Party is on 0.3% (steady).

Electorate Contests

Act’s probability of winning at least one electorate seat is 82%, up from 81% last week, and its expected electorate representation is down to 0.8 MPs, from 0.9 MPs last week. The market continues to price that its candidate David Seymour has an 80% probability of winning Epsom (steady compared with last week).

The Conservative Party’s probability of winning at least one seat has fallen back to 35% (from 39% last week), but its expected electorate representation is steady on 0.4 MPs. The Conservatives are not expected to win any specific electorate and leader Colin Craig has 33% probability of winning in East Coast Bays against Murray McCully (down from 35% last week).

UnitedFuture continues to have a 79% probability of winning at least one seat (steady compared with last week) and its expected electorate MP representation is 0.8 MPs (also steady). However, its probability of winning Peter Dunne’sOhariu electorate is priced at 80% (up from 77% last week).

In the Maori electorates, Mana continues to have an 85% probability of winning at least one seat (steady compared with last week) and its expected electorate representation is up to 1.2 electorate MPs, from 1.0 MPs last week. The Maori Party has recovered marginally but it remains in serious trouble. It now has a 45% probability of winning an electorate (up from 43% last week) and its expected electorate representation is up to 0.6 MPs, from 0.5 MPs last week.

The probability Mana leader Hone Harawira will win Te Tai Tokerau is now 83% (down from 85% last week) but its candidate in Waiariki, Annette Sykes, is back to 40% (from 25% last week and 33% the week before). Maori Party Leader Te Ururoa Flavell now has just a 43% probability of winning the seat, down from 45% last week. The probability the Maori Party’s Chris McKenzie will retain Tariana Turia’s Te Tai Hauauru electorate for the party is now down to 10%, from 11% last week, 13% the week before and 17% three weeks ago. Labour is favoured to win with 90% probability.

However, Pita Sharples’ Tamaki-Makaurau electorate may be back in play, having looked safe for Labour most of the year. Labour’s Peeni Henare now has just a 50% probability of winning the seat, ahead of the Maori Party’s Rangi McLean on 31% and Mana on 18%.

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

The three most marginal seats, excluding those mentioned above, are Port Hills, Waimakariri and Palmerston North.

In Port Hills, Labour’s Ruth Dyson now has a 55% probability of retaining her seat (down from 60% last week) from National’s challenger, Nuk Korako (down from 60% last week).

In Waimakariri, National’s Matthew Doocey now has a 55% probability of beating Labour’s Clayton Cosgrove (up from 53% last week).

In Palmerston North, National’s Jono Naylor now has a 57% probability of beating Labour’s Ian Lees-Galloway (up from 50% last week)

Election Result & Alternative Scenarios

Based on the party-vote and electorate forecasts above, Parliament would consist of: National 55 MPs (steady compared with last week), Labour 36 MPs (steady), the Greens 16 MPs (up from 15), NZ First 7 MPs (steady), Act 3 MPs (steady), Internet-Mana 2 MPs (down from 3) and UnitedFuture 1 MP (steady). Assuming the Maori Party did not win Waiariki, it would have no MPs (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 and UnitedFuture would have only 59 seats and could not govern. National could govern with the support of NZ First with whom it would hold 62 seats. However, Labour would also be able to form a government with the Greens, Internet-Mana and NZ First, with 61 seats.

NZ First would therefore hold the balance of power and be in a position to choose whether New Zealand had a National- or Labour-led government.

Were the Maori Party to win Waiariki but the Conservative Party to miss out on East Coast Bays, Parliament would be the same except that National would have only 54 MPs and the Maori Party 1. Again, neither National nor Labour could form a government without the support of NZ First.

Given speculation National may negotiate with the Conservative Party over an electorate accommodation, iPredict has also projected a scenario based on the market’s party vote and electorate forecasts, but with the addition of the Conservative Party and Maori Party both winning electorates. Under that scenario, Parliament would consist of: National 53 MPs, Labour 34 MPs, Greens 15 MPs, NZ First 7 MPs, Conservatives 5 MPs, Act 2 MPs, Internet Mana 2 MPs, UnitedFuture 1 MP and the Maori Party 1 MP. Parliament would have 120 MPs and a government would be required to have the support of 61 MPs on confidence and support. National would be able to govern with the support of both the Conservative and Act parties and one or both of UnitedFuture and the Maori Party.

Given the likely importance of NZ First, iPredict has a bundle of stocks forecasting NZ First’s decision-making should it hold the balance of power. This indicates a very tight situation. There is a 50% probability Mr Peters would support a National-led government (down from 56% last week) and a 2% probability he would give confidence and supply to neither National nor Labour (down from 2%) which would favour the larger bloc which the market indicates would be National-led. There is a 47% probability Mr Peters would support a Labour-led Government, up from 39% probability last week.

Overall, National now has a 78% probability of leading the next government, down from 80% last week and 81% the week before.

Post Election Developments

David Cunliffe’s position as Labour leader remains bleak. There is now a 51% probability he will depart as leader by the end of 2014 (up from 50% last week), an 88% probability he will depart by the end of 2015 (steady), a 92% probability he will depart by the end of 2016 (up from 91%), and a 99% probability he will depart by the end of 2017 (up from 98%).

Grant Robertson continues to be strongly favoured to succeed Mr Cunliffe. He has a 70% probability of being the next Labour leader (steady compared with last week), followed by Jacinda Ardern on 9% (steady), and David Parker and Andrew Little both on 5% probability (both steady).

In National, John Key’s position has improved marginally. He now has a 41% probability of departing as leader by the end of 2015 (down from 43% last week), a 62% probability of departing by the end of 2016 (down from 63%), and an 81% probability he will depart by the end of 2017 (steady).

Steven Joyce remains favoured to succeed Mr Key as National Party leader, and has a 45% probability (up from 42% last week), followed by Judith Collins on 17% probability (steady) and Simon Bridges on 8% (steady), and Paula Bennett and Bill English, both on 7%.

Labour’s chances of winning the 2017 election have improved to 52%, from 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 12.20 pm today.

ENDS

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