John Key’s shock decision last December to hand over the reins to Bill English has been rewarded by voters, with the New Zealand leader likely securing a fourth term for his center-right National party. But while the horse-trading for a stable coalition gets underway, the new government faces the prospect of economic growth having already passed its peak.
English said he would commence negotiations with New Zealand First, which holds the balance of power following Saturday’s poll in which National won the most votes, but failed to achieve a parliamentary majority in its own right.
National secured 46 percent of the vote, well ahead of its main rival, the center-left Labour party, which secured 35.8 percent, while New Zealand First gained 7.5 percent and the Greens 5.9 percent. In terms of seats though, National lost three, falling to 58, while Labour gained 13 seats, moving up to 45. NZ First won nine seats, down two, while the Greens slipped to seven seats, nearly half their previous presence following the 2014 poll.
English told supporters that the voters had spoken and “now we have the responsibility of working to give New Zealand strong and stable government.” He pointed out that “just short of half of New Zealanders voted National and 10 percent more than our nearest rivals.”
However, NZ First’s leader Winston Peters said he would be patient in making a decision over which side to join forces with.
“We do have the main cards, we’re not going to squander that,” Peters said Saturday. “We’ll make a decision in the interest of all New Zealand” and “that will take some time.”
Greens leader James Shaw said “New Zealanders overwhelmingly voted for change,” pushing for a Labour-Greens coalition with NZ First. Labour’s Jacinda Ardern, who assumed the leadership barely a month before the polling date but managed to revive the party’s fortunes, said the final decision on who formed government would be decided by others.
The 37-year-old Labour leader had campaigned on boosting spending on education, health and housing, while banning “overseas speculators” from buying existing houses, cutting immigration, increasing minimum wages and introducing new taxes such as a capital gains tax. The party also promised to renegotiate New Zealand’s free trade agreement with South Korea, as well as the nation’s support for the Trans-Pacific Partnership.
English criticized Labour’s platform as being “inward looking,” calling it a “formula of tax-and-spend, higher borrowing, more central government bureaucracy.” Instead, the 55-year-old former finance minister pledged to cut taxes, maintain free markets and “flexible” employment regulations, while investing in public infrastructure and services.
Financial markets during the campaign showed their preference for continuity, with the Kiwi dollar falling whenever Labour rose in opinion polls and rising when National took the lead. First NZ Capital suggested a change of government could spook foreign investors, while Standard Chartered analysts argued that Labour’s plan to cut immigration would damage long-term economic growth.
As a result, the likely continuation of a National-led government is expected to be welcomed by investors, according to analysts.
“The balance of probabilities is that there will be some sort of National-led government, so I would expect a little bit of relief in markets on Monday,” Harbour Asset Management’s Christian Hawkesby told Bloomberg News. “There may be some more volatility to come as bits of information dribble out on the likely make-up of a coalition.”
Peters campaigned on cutting immigration and foreign investment while reforming monetary policy, measures that would find greater support from a Labour-led government. However, while the 72-year-old has previously served both Labour and National governments, he has favored the party that won the most votes, suggesting he would be more likely to back National depending on the inducements offered for his support.
English’s win followed a roller-coaster campaign in which Ardern appeared within touching distance of victory, before suffering an abrupt end to her political honeymoon after National attacked Labour’s economic plans. National’s share of the vote was only 2 percentage point lower than the 2014 poll, with voters seemingly favoring continuity after eight straight years of economic growth and the restoration of a budget surplus.
The latest gross domestic product (GDP) data showed the New Zealand economy expanded by 0.8 percent in the June quarter, in line with analyst expectations and putting the world’s 53rd largest economy on track for a ninth straight year of expansion.
However, the honeymoon may be brief for the new government. London-based Capital Economics suggests that a cooling housing market and lower migration could result in a sharp slowdown, depending on the level of the immigration curbs enacted by the next government.
“New Zealand has experienced some of the strongest rates of economic growth amongst advanced economies in recent years as a result of record high net migration, a booming housing market and a thriving tourism sector. But the economy appears to be approaching a turning point as the housing market has already come off the boil and net migration may well be approaching its peak,” Capital Economics’ Kate Hickie said in a September 12 report.
Hickie said record high household debt levels, combined with slowing migration and house price inflation, would see consumption growth drop from 4 percent in 2017 to just 2 percent in 2019. Reduced migration would also hit dwellings investment, from contributing 0.7 percentage point GDP growth to “almost nothing.”
As a result, while the Reserve Bank of New Zealand (RBNZ) expects GDP growth of 3.7 percent in 2018 and 3.1 percent in 2019, Capital Economics sees the economy slipping to 3 percent and 2.5 percent, respectively, forcing the central bank to keep its official cash rate steady at 1.75 percent until the second half of 2019.
RBNZ’s newly appointed governor, Grant Spencer will “almost certainly” keep policy settings on hold at his first policy setting meeting, scheduled for September 28, the consultancy said.
However, should a Labour government be installed, the RBNZ would face changes to its mandate, including a goal of full employment, as well as greater external input into the central bank’s monetary policy decisions.
While suggesting that such changes would have little impact on the central bank, Capital Economics said Labour’s plans to tighten immigration and housing controls “may well lead to slightly slower GDP growth over the next few years than under a National-led government.”
ANZ Research has pointed to “capacity constraints and late-cycle economic challenges,” amid a slow expected rise in inflation and interest rates. According to a July report, “skill shortages are crimping the economy’s ability to grow” while “a lot will need to go right for things not to go wrong” concerning the international outlook.
Nevertheless, the Australian bank forecast GDP growth of 2.8 percent in 2017, rising to 3 percent next year before slipping back to 2.4 percent in 2019, amid “solid, rather than stellar” growth.
In its latest assessment, the International Monetary Fund (IMF) warned of “downside risks stemming from a booming housing market, as well as the potential for tighter external financial conditions, lower demand from trading partners, or disruptions to international trade.”
China overtook Australia as New Zealand’s top trading partner in 2013, placing New Zealand in a vulnerable position should the Korean crisis intensify or from a further slowdown in China, which would also dampen growth across the Tasman.
For the next New Zealand government, keeping the economy on track while appeasing populist demands to curb immigration and tighten housing controls could prove challenging, amid an increasingly uncertain international outlook. Winning the electoral race could yet prove far easier than managing rockier economic times ahead.