IPREDICT LTD

2014 ELECTION UPDATE #21

Wednesday 11 June 2014

www.ipredict.co.nz

Key Points:

• Reserve Bank to raise OCR again tomorrow

• Probability of fiscal surplus in 2014/15 dips

• Complex post-election situation forecast

• NZ First to hold balance of power and decide whether National or Labour governs – but National could govern without NZ First if Conservatives win seat

• Waiariki now extremely tight, with Maori Party at a 43% risk of leaving parliament altogether

• National moves ahead again in Hamilton East

Commentary:

NZ First will decide whether New Zealand has a National or Labour-led Government after September’s election, according to this week’s snapshot of the combined wisdom of the 7000 registered traders on New Zealand’s online predictions market, iPredict. With 61 seats required to govern, a National/Act/United Future/NZ First government would hold 65 seats, while a Labour/Green/Internet Mana/Maori Party/NZ First coalition would have 61 seats. However, Maori Party Co-Leader Te Ururoa Flavell is in a tight battle with Mana to retain his Waiariki electorate, which may be essential for the party to remain in parliament. The Conservative Party is not expected to win a seat but, if it did, National could govern without NZ First. The market expects the Reserve Bank to raise the OCR a further 25 basis points at tomorrow’s announcement. While forecasts for growth, unemployment and New Zealand’s current account deficit remain broadly unchanged this week, the probability of a 2014/15 fiscal surplus has slipped to 82%.

Economic Context

Growth expectations remain broadly steady this week. Growth in the March 2014 quarter is now expected to be 1.2% (up from 1.1% last week), 1.0% in the June quarter (steady), 1.0% in theSeptember quarter (down from 1.1%) and 1.1% in the December quarter (steady). Forecast annual growth for 2014 remains 4.4% (steady).

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

Forecasts for New Zealand’s current account deficit are largely unchanged and the deficit is expected to be 3.1% for the March 2014 quarter (steady compared with last week), 3.3% in the June quarter (steady), 3.7% in the September quarter (down from 3.9%) and 3.9% in the December quarter (steady).

The probability of a fiscal surplus in 2014/15 has fallen to 82% (down from 84% last week). The surplus forecast for 2014/15 is 0.42% of GDP (down from 0.43%), while the forecast for the 2015/16 surplus is 0.974% of GDP (steady), and the forecast surplus for 2016/17 remains 2.00% of GDP (steady).

Inflationary expectations 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 1.7%, (up from 1.6% last week), 1.6% in the September quarter (steady) and 1.7% in the December quarter (steady).

The market is forecasting an 94% probability that the Reserve Bank will increase the Official Cash Rate (OCR) by 25 basis points at its next review tomorrow (up from 88% last week). Compared with the rate of 2.5% at the start of 2014, the market is pricing that the OCR will be up 74 basis points in June (up from 72), 84 in July (up from 83), 92 in September (up from 89), 102 in October (up from 99), 112 inDecember (up from 108), 117 in January 2015 (up from 113) and 132 in March 2015 (up from 128).

Other Issues

There is now just a 4% probability Judith Collins will lose all her ministerial portfolios before parliament is dissolved on 14 August, down from 10% last week and 19% two weeks ago.

New Zealand’s chances of being elected to the UN Security Council for 2015-16 has increased to 48% (up from 37%, last week, and closing in on the 53% recorded a month ago). The probability Helen Clark will be appointed the next UN Secretary General has fallen to 21%, down from 27% last week. The probability New Zealand will sign a Free Trade Agreement with South Korea before 1 December 2014 is unchanged at 52%.

The probability the US Congress will ratify the yet-to-be-signed Trans Pacific Partnership (TPP) agreement before 1 July 2015 is 11% (steady), and there remains a 35% probability a deal will be ratified by the US Congress by 1 July 2017 (steady).

Party Vote

All current party leaders, except for Maori Party co-leaders Tariana Turia, are strongly expected to remain in their roles until nomination day with at least 94% probability. The party vote turnout is expected to be 77.7% (down from 78.3% last week), up from the 74.2% turnout in 2011.

Of major parties, National is expected to win 43.9% of the party vote, up from 42.6% last week. Labourhas slipped back to 30.5%, from 32.3% last week, while the Green Party is up to 10.9%, from 10.2% last week.

Of smaller parties, NZ First is still expected to win 5.1% of the party vote, steady compared with last week. The Conservative Party’s forecast party vote is unchanged at 3.6%, still short of the 5% threshold required for parliamentary representation unless it wins an electorate seat. Act is down slightly to 2.2 (compared to 2.3% last week), while support for UnitedFuture remains unchanged at 0.5%.

Support for other smaller parties remains unchanged, with the Internet Mana alliance expected to win 2.0%, the Maori Party 0.9%, and the Aotearoa Legalise Cannabis Party 0.2%.

Electorate Contests

Act’s probability of winning at least one electorate seat is 81%, down from 83% last week, and its expected electorate representation is now 0.80 MPs, down from 0.83 MPs. The market is pricing that it has an 80% probability of winning Epsom (down from 84%).

The Conservative Party’s probability of winning at least one seat is 39%, up from 35%, and its expected electorate representation has increased to 0.47 MPs from 0.35 MPs last week. The Conservatives are not expected to win any specific electorate. Their probability of winning East Coast Bays is 29% (steady), their probability of winning Rodney is 10% (down from 11%), and they remain behind both National and Labour in Upper Harbour where they have just a 6% probability of victory, down from 7% last week.

UnitedFuture prospects remain largely unchanged. It has a 78% probability of winning at least one seat (steady compared with last week) although its expected electorate MP representation is 0.77 MPs, down from 0.79 MPs. Its probability of winning Peter Dunne’s Ohariu electorate remains 79% (steady).

In the Maori electorates, Mana now has an 80% probability of winning at least one seat (up from 71% last week) and its expected electorate representation is 1.1 electorate MPs, up from 1.0 MPs. The Maori Party has a 57% probability of winning a seat (down from 60% last week) and its expected electorate representation has fallen to 0.68 MPs, down from 0.71 MPs.

Mana’s probability of winning Te Tai Tokerau has increased and is now 79%, up from 71% last week, and it has narrowed the gap in Waiariki where it has 47.5% probability of winning (up from 40% last week), just behind Maori Party Leader Te Ururoa Flavell on 53% probability (down from 57% last week). The probability the Maori Party will retain Tariana Turia’s Te Hauauru electorate is 20% (up from 17%), with Labour favoured to win with 80% probability (down from 83%).

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

The six most marginal general seats, excluding Waiariki, East Coast Bays and Te Tai Tokerau are now Hamilton East, Palmerston North, Port Hills, Tamaki Makaurau, Te Atatu and Waimakariri.

In Hamilton East, incumbent National MP David Bennett has moved ahead of Labour challenger Dr Cliff Allen and now has 57% probability of retaining the seat (up from 50%), with Dr Allen falling to 40% probability (down from 50% last week).

In Palmerston North, Labour’s Ian Lees-Galloway has continued to edge ahead and has a 60% probability (up from 57% last week) of retaining the seat from National candidate and Palmerston North Mayor Jono Naylor who has 40% probability (steady).

In Port Hills, support for Labour’s Ruth Dyson has slipped, and she now has 60% probability of holding the seat (down from 69%).

In Tamaki Makaurau, Labour’s Peeni Henare has a 67% probability of winning the seat currently held by retiring Maori Party MP Dr Pita Sharples, down from 71% last week.

In Te Atatu, Labour’s Phil Twyford now has 67% probability of holding the seat, up from 53% last week, while in Waimakariri, Labour’s Clayton Cosgrove also has 67% probability of winning the seat from National’s Matthew Doocey, down from 73% last week.

Election Result & Alternative Scenarios

Based on the party vote forecasts and the electorate results above, Parliament would consist of: National 55 MPs, Labour 38 MPs, the Greens 14 MPs, NZ First 6 MPs, Act 3 MPs, Internet Mana 2 MPs and the Maori Party and UnitedFuture 1 MP each. 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, United Future and the Maori Party would fall one seat shy of the 61 seats needed to form a government and National would require the support of NZ First to form a government. A National/NZ First government would have 61 seats and, with the addition of Act, the Maori Party and UnitedFuture would have 64 seats. However, Labour would also be able to govern under current prices, with. Labour, Greens, NZ First, Internet Mana and the Maori Party forecast to hold a combined 61 seats. NZ First would therefore hold the balance of power and choose which major party governs.

With growing speculation National may negotiate with the Conservative Party over an electorate accommodation, iPredict has also projected a scenario based on the party vote forecasts and the electorate results above, with the addition of the Conservative Party winning an electorate. Under that scenario, Parliament would consist of: National 53 MPs, Labour 37 MPs, Greens 13 MPs, NZ First 6 MPs, Act 3 MPs, Conservatives 4 MPs, Internet Mana 2 MPs, and the Maori Party and UnitedFuture 1 MP each. Parliament would have 120 MPs and a government would be required to have the support of 61 MPs on confidence and support. National would therefore be able to form a government with the support of Act, the Conservatives and United Future, with a combined 61 seats. National, NZ First, and the Conservatives would hold 63 seats.

iPredict’s bundle of stocks forecasting NZ First’s decision-making should it hold the balance of power indicates Mr Peters would support a National-led Government. There is now a 44.2% probability he would give confidence and supply to National (down from 50% last week) and an 8.1% probability he would give confidence and supply to neither (down from 10.0% last week), which would favour the larger bloc, which the market indicates would be National-led. There is a 47.7% probability he would give confidence and supply to Labour (up from 39.7% last week).

Overall, National now has a 73% probability of leading the next government, unchanged from last week.

Post Election Developments

David Cunliffe’s position as Labour leader remains unchanged. There remains a 70% probability he will depart as leader by the end of 2015, steady compared to last week, a 75% chance he will depart by the end of 2016, steady, and an 85% probability he will step down by the end of 2017, steady.

Grant Robertson continues to be strongly favoured to succeed Mr Cunliffe. He has a 65% probability of being the next Labour leader (up from 60% last week), followed by Jacinda Ardern on 17% (down from 18%) and Andrew Little on 9% (down from 10%).

In National, John Key now has a 56% probability of departing as leader by the end of 2015 (up from 54% last week), a 71% probability of departing by the end of 2016 (up from 70%) and an 86% probability he will depart by the end of 2017 (steady).

Steven Joyce remains favoured to succeed Mr Key as National Party leader, with 53% probability (up from 42% last week), followed by Judith Collins on 11% probability (down from 16%) and Simon Bridges on 9% (up from 8%).

Labour’s chances of winning the 2017 election have increased to 55% (up from 53% 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 10.18 am today.

ENDS

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