IPREDICT LTD

2014 ELECTION UPDATE #28

Monday 28 July 2014

www.ipredict.co.nz

Key Points:

• Surplus forecast continues dramatic fall

• Inflationary expectations creep up as interest-rate forecasts fall

• NZ First and Internet-Mana rise at expense of major parties

• Conservatives to miss out on seats and 5%

• Peters to hold balance of power and picked to back National

• Cunliffe’s chances of surviving year worsen

• 2017 neck-and-neck between National and Labour

Commentary:

The chances of a fiscal surplus in 2014/15 continue to plunge and are down to 50%, according to the combined wisdom of the 7000 registered traders on New Zealand’s online predictions market, iPredict. The forecast surplus is now just 0.22% of GDP, down from 0.43% a month ago. Meanwhile, the RBNZ is not expected to raise the OCR again this year, prompting inflationary expectations to creep up. In politics, the forecast party votes for National, Labour and the Greensare all down, with the winners being NZ First and Internet-Mana. The former is expected to hold the balance of power after the election and elect to back National, while the Conservative Party’s chances of entering parliament have crashed tonegligible levels. David Cunliffe is not expected to survive the year as Labour leader and the 2017 election is now judged to be 50:50 between National and Labour.

Economic Context

Growth expectations have improved fractionally this week. Growth in the June quarter is now expected to be 0.9% (steady compared with last week), 1.0% in the September quarter (steady) and 1.2% in the December quarter (up from 1.1%). Forecast annual growth for 2014 is steady on 4.1%.

Stocks forecasting growth in the March 2015, June 2015, September 2015 and December 2015 quarters are now open for trading, but have not yet attracted sufficient volumes to make robust forecasts.

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 have again improved marginally this week. The forecast deficit for the June quarter is now 2.8% of GDP (down from 2.9% last week), 3.7% in the September quarter (steady) and 3.9% in the December quarter (down from 4.0%).

The probability of a fiscal surplus in 2014/15 has fallen dramatically this week, and is at 50% for the first time, down from 64% last week, 76% two weeks ago, 84% three weeks ago and 86% four weeks ago. The surplus forecast for 2014/15 is now just 0.22% of GDP, down from 0.31% last week, 0.37% the week before, 0.42% three weeks ago and 0.43% a month ago. Future surplus forecasts are steady at 1.0% of GDP in 2015/16, 2.0% for 2016/17 and 2.4% for 2017/18.

Inflationary expectations have risen this week but remain below the Reserve Bank’s 2% target midpoint through 2014. Annual inflation to the end of the September quarter is expected to be 1.6% (up from 1.5% last week), and 1.8% in theDecember quarter (up from 1.7%).

Stocks forecasting inflation in the March 2015, June 2015, September 2015 and December 2015 quarters are now open for trading, but have not yet attracted sufficient volumes to make robust forecasts.

The rise in inflationary expectations mirrors a fall in interest-rate expectations. As widely forecast, including by iPredict, the Reserve Bank of New Zealand (RBNZ) increased the Official Cash Rate (OCR) by 25 basis points last Thursday, but the next increase is not expected for some time. There is a 93% probability of no change on 11 September, an 85% probability of no change on 30 October, a 62% probability of no change on 11 December and a 62% probability of no change on 29 January, but a 67% probability of a 25-point rise on 12 March.

Compared with the rate of 2.5% at the start of 2014, the market is pricing that the OCR will be up 100 basis points in September (down from 104), 104 in October (down from 105), 112 in December (down from 115), 117 in January 2015(down from 120), 133 in March 2015 (down from 135), 142 in April 2015 (down from 144) and 158 in June 2015 (down from 160).

Foreign Affairs & Trade

New Zealand’s chances of being elected to the UN Security Council for 2015-16 are steady at 30%, as is the probability Helen Clark will be appointed the next UN Secretary General at 29%. The probability New Zealand will sign a Free Trade Agreement with South Korea before 1 December 2014 is down to 14% (from 16% last week, 22% the week before and 26% three weeks ago. The probability the US Congress will ratify the yet-to-be-signed Trans Pacific Partnership (TPP) agreement before 1 July 2015 is down to 3% (from 11% last week) and the probability of ratification by 1 July 2017 is down to 21% (from 29% last week).

Party Vote

All current party leaders, including Maori Party co-leader Tariana Turia, are strongly expected to remain in their roles until nomination day with at least 90% probability. The party vote turnout is expected to be 74.1% (steady compared with last week).

Of major parties, National is expected to win 44.2% of the party vote (down from 45.3% last week), Labour is expected to win 29.6% (down from 29.8%), and the Green Party is expected to win 10.7% (down from 10.8%).

Of smaller parties, NZ First’s expected party vote is 5.7% (up from 5.1% last week), the Conservative Party is on 3.7% (up from 3.6%), Internet Mana is on 2.8% (up from 2.2%), Act is on 1.9% (up from 1.8%), the Maori Party is on 0.8% (down from 0.9%), UnitedFuture is on 0.2% (down from 0.4%), and the Aotearoa Legalise Cannabis Party is on 0.2% (steady).

Electorate Contests

In key electorate contests, Mana has an 86% probability of winning at least one seat (up from 83% last week) and its expected electorate representation is steady on 1.2 electorate MPs. The probability Mana leader Hone Harawira will winTe Tai Tokerau is 85% (up from 82% last week) and its candidate in Waiariki, Annette Sykes, is on 43% probability (steady).

Act’s probability of winning at least one electorate seat is 84% (steady compared with last week), and its expected electorate representation is 0.9 MPs (steady). The market is pricing that its candidate David Seymour has an 85% probability of winning Epsom (steady).

UnitedFuture has an 85% probability of winning at least one seat (up from 83% last week) and its expected electorate MP representation is 0.8 MPs (steady). Its probability of winning Peter Dunne’s Ohariu electorate is 83% (up from 82% last week).

The Maori Party continues to recover but remains in trouble. It now has a 51% probability of winning an electorate (up from 48% last week and 45% the week before) and its expected electorate representation is 0.7 MPs (steady). The probability co-leader Te Ururoa Flavell will win Waiariki is 50% (up from 48% last week).

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

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

The two most marginal seats, excluding those mentioned above, are Palmerston North and Port Hills

In Palmerston North, National’s Jono Naylor has edged ahead of Labour’s Ian Lees-Galloway and now has a 55% probability of winning the seat (up from 50% last week).

In Port Hills, Labour’s Ruth Dyson is on 59% probability of retaining her seat (steady compared with last week) from National’s challenger, Nuk Korako.

Election Result & Alternative Scenarios

Based on the party-vote and electorate forecasts above, Parliament would consist of: National 56 MPs (down from 57 last week), Labour 37 MPs (steady), the Greens 13 MPs (down from 14), NZ First 7 MPs (up from 6), Internet-Mana 4 MPs (up from 3), Act 2 MPs (steady), UnitedFuture 1 MP (steady) and the Maori Party 1 MP (up from 0). Parliament would have 121 MPs and a government would be required to have the support of 61 MPs on confidence and supply.

Under this scenario, the current governing arrangement of National, Act, UnitedFuture and the Maori Party would have only 60 seats and could not govern. National could govern with the support of NZ First with whom it would hold 63 seats. Labour could also form a government with the Greens, Internet-Mana and NZ First, with a combined 61 seats.

Were the Maori Party to miss out on Waiariki, Parliament would be the same as above except that the Greens would have 14 MPs and the Maori Party none. This would not change the situation in terms of forming a government, with either a National/NZ First or a Labour/Green/Internet-Mana/NZ First government being possible.

Given the likelihood NZ First will hold the balance of power, iPredict has a bundle of stocks forecasting NZ First’s decision-making should it hold the balance of power. This indicates its preference is shifting to National. There is a 55% probability Mr Peters would support a National-led government (up from 49% last week) and a 4% probability he would give confidence and supply to neither National nor Labour (up from 2%) which would favour the larger bloc, which the market indicates would be National-led. There is a 41% probability Mr Peters would support a Labour-led Government (down from 47%)

Overall, National now has an 82% probability of leading the next government, up from 80% last week and 78% the week before.

Post Election Developments

David Cunliffe’s immediate position as Labour leader has worsened but his longer-term prognosis if he survives the year has edged up. There is now a 65% probability he will depart as leader by the end of 2014 (up from 52% last week), an 86% probability he will depart by the end of 2015 (down from 88%), a 88% probability he will depart by the end of 2016 (down from 92%) and a 95% probability he will depart by the end of 2017 (down from 99%).

Grant Robertson continues to be strongly favoured to succeed Mr Cunliffe as next Labour leader, with 66% probability (up from 65% last week). David Parker remains in second-place with 15% probability (down from 19%), followed by Jacinda Ardern on 8% (steady).

In National, John Key’s position continues to strengthen. He now has an 11% probability of departing by the end of 2014 (not reported last week), a 33% probability of departing as leader by the end of 2015 (down from 38% last week), a 55% probability of departing by the end of 2016 (down from 59%), and a 77% probability of departing by the end of 2017 (down from 80%).

Steven Joyce remains favoured to succeed Mr Key as National Party leader, with 45% probability (steady compared with last week), followed by Judith Collins on 17% probability (steady), followed by Simon Bridges, Paula Bennett and Bill English, all on 7% (all steady).

Labour’s chances of winning the 2017 election have fallen to 50% (from 52% last week) and that election is again 50:50 between the two main parties.

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 7.53 am today.

ENDS

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