iPredict Election Update #37

Key Points:

* GDP growth expectations improve

* OCR expected to be increased in September and reach 3.75% in June 2012

* Floating mortgage rates strongly predicted to hit 6.00% in 2011

* New Zealand First still above MMP’s 5% threshold

* Despite NZ First, John Key’s National Party could govern with Act alone

Commentary:

GDP growth forecasts are up according to this week’s snapshot from New Zealand’s prediction market, iPredict. There is an expectation that the OCR will increase as early as September and more frequently than previously indicated; consequently, there is an increased likelihood that mortgage rates will reach at least 6.00% before the end of the year. In politics, New Zealand First remains above MMP’s 5% threshold, although its hold on this is tenuous, with the market also indicating only a 22% probability that Winston Peters will return to Parliament. Despite New Zealand First’s current forecast share of the party vote, John Key would still be able to form a Government with the support of the Act Party alone.

Economic Context

Expectations for GDP growth have improved this week. Growth is expected to be 0.7% for the June quarter (up from 0.6% last week), 0.9% for the September quarter (up from 0.8% last week), 0.8% for the December quarter (up from 0.7% last week) and 0.6% for the March 2012 quarter (steady).

Forecast unemployment has deteriorated in the short term, but there is improvement predicted in the medium term. Unemployment is expected to be 6.6% in the June 2011 quarter (up from 6.4% last week), 6.4% for the September 2011 quarter (steady), 6.1% in the December 2011 quarter (steady) and 6.1% in the March 2012 quarter (down from 6.2% last week).

Inflation expectations have remained steady. Annual inflation is expected to be 5.1% in the September 2011 quarter, 2.9% in the December 2011 quarter, and 2.6% in the March 2012 quarter.

The market continues to indicate strongly that petrol prices will be capped at a maximum price of $2.30 this year. The probability that unleaded petrol will exceed $2.30 per litre in 2011 is 22% (down from 26% last week), the probability it will exceed $2.40 per litre is 11% (down from 12% last week), and the probability it will go above $2.50 per litre is 10% (steady).

As predicted by iPredict last week, the OCR remained unchanged in July. The market expects Reserve Bank Governor Alan Bollard to increase the OCR e in September to 2.75%, then again in October, to 3.00%. In 2012, increases are expectedin January 2012 (to 3.25%), in March 2012 (to 3.50%), and in June 2012 (to 3.75%).

The expected 90-day bank bill rate for 1 September 2011 is 3.05% (up from 2.87% last week) and for 1 December 2011 is 3.20% (up from 3.02% last week).

There is an 93% probability that average floating-rate mortgages will reach 6.00% by the end of the year, up from an 87% probability last week, but just a 27% probability that they will reach 6.50% in 2011, up from 25% last week.

The market is indicating a Current Account deficit of 4.82% of GDP for the year to June 2011 (down from 5.04% last week), 4.71% of GDP for the year to September 2011 (down from 4.81% last week), and 4.30% of GDP for the year to December 2011 (up from 4.26% last week).

Parties and Personnel

All current leaders of parliamentary parties have at least a 91% probability of remaining in their positions until the election. The most vulnerable is Labour Party leader Phil Goff, but with just a 9% probability of being replaced prior to the election (down from 10% last week).

Key Electorate Contests

Act has a slightly weakened position in Epsom this week with an 89% probability (down from 90% last week) that the seat will be won by a candidate other than a National candidate or incumbent Act MP Rodney Hide.

In Ohariu, United Future’s Peter Dunne has a 73% probability of being re-elected (down from 74% last week)

The market once again appears to be in two minds about New Zealand First. On one hand, it has breached MMP’s 5% threshold this week with a party vote share of 5.1% (steady), but the market also predicts that party leader Winston Peters has only a 22% probability of returning to Parliament (down from 23% last week).

Expectations that Mana Party leader Hone Harawira will retain the Te Tai Tokerau seat in the General Election have improved slightly at 82% (up from 81% last week).

Maori Party Co-Leader Pita Sharples is expected to retain Tamaki-Makaurau (66%, steady), Co-Leader Tariana Turia is expected to retain Te Tai Hauauru (79%, steady), and Te Ururoa Flavell is expected to retain Waiariki (73%, up from 72% last week).

For the Labour Party, Nanaia Mahuta is expected to retain Hauraki-Waikato (76%, steady) and Labour’s position in Ikaroa-Rawhiti (currently Parekura Horomira’s seat) has improved (72%, up from 66% last week)

Te Tai Tonga remains forecast to change hands, with a 74% probability it will be won by Labour’s Rino Tirikatene from the Maori Party’s Rahui Katene (steady compared with last week).

In marginal electorates other than those mentioned above, the probability National’s Jonathan Young will retain New Plymouth has improved markedly (78%, up from 66% last week). There is a 76% probability that National’s Nikki Kaye will retain Auckland Central (down from 77% last week). National’s Paula Bennett is favoured to retain Waitakere (55%, up from 52% last week) and Labour’s Damien O’Connor is expected to win back West Coast-Tasman for Labour (57%, steady).

With no changes to forecast winners in electorate seats over the last week, National continues to be expected to win 40 electorate seats, Labour 24, the Maori Party 3, and Act, United Future and the Mana Party 1 each.

Party Vote, Election Result and Alternative Scenarios

Forecast party vote shares are now: National 45.5% (up from 44.5% last week), Labour 31.9% (steady), the Greens 7.3% (up from 7.2% last week), New Zealand First 5.1% (steady), Act 5.0% (up from 4.9% last week), UnitedFuture 1.8% (down from 2.3% last week), the Maori Party 1.8% (down from 1.9% last week), the Mana Party 1.4% (down from 1.7% last week), the New Citizen Party 0.4% (steady), the proposed Reform New Zealand Party 0% (steady) and the newly proposed Conservative Party 1.1%.

Based on this data, and the electorate results above, Parliament would be as follows: National 55 MPs, Labour 38 MPs, the Greens 9 MPs, Act 6 MPs, New Zealand First 6 MPs, the Maori Party 3 MPs, UnitedFuture 2 MPs and the Mana Party 2 MPs. There would be 121 MPs, requiring a government to have the support of 61 MPs on confidence and supply, so that even with the appearance of New Zealand First, John Key’s National Party could govern with the support of the Act Party alone.

Given New Zealand First’s proximity to MMP’s 5% threshold, iPredict has also analysed what might happen should it win only 4.9% of the vote. Under this scenario, Parliament would be as follows: National 58 MPs, Labour 41 MPs, the Greens 9 MPs, Act 6 MPs, the Maori Party 3 MPs, UnitedFuture and the Mana party 2 MPs each. There would be 121 MPs, requiring a government to have the support of 61 MPs on confidence and supply. John Key’s National Party would require the support of either the Act Party or the Maori Party.

Overall the market indicates a 91% probability there will be a National Prime Minister after the election (up from 88% last week).

MMP Referendum and Miscellaneous

The probability New Zealanders will elect to retain the MMP voting system in the referendum to be held on Election Day is 78%, up from 77% last week.