Will Key’s exit lead to uncertainty or good times?

Economists identify risks for the next Prime Minister

Michael Gordon

Prime Minister John Key’s resignation came roughly a year ahead of the next general election, which will be held in late 2017.

He cited wanting to spend more time with family and a desire not to overstay his time at the top, as the main reasons for his decision. Not wanting to serve a fourth term in office, he felt the issue could cloud the forthcoming election campaign.

Under Mr Key, the National government pursued a conservative approach to managing the government coffers, focused on improving the fiscal debt position.

Despite the coming change in leadership, we do not expect any major changes in policy ahead of next year’s election.

The Prime Minister’s resignation adds an additional layer of uncertainty ahead of next year’s election. The economic policies of both of New Zealand’s main political parties are relatively centrist. However, there are areas where their policies differ, such as housing.

There was only a limited market reaction to the announcement, with the New Zealand dollar falling around 20 bps. Interest rates were largely unchanged.

Acting Chief Economist at Westpac.

Nick Tuffley

The market reaction has been muddied by timing, as the Italian Prime Minister Matteo Renzi also resigned due to the result of the weekend’s referendum.

The NZD/USD was already under pressure as the Italian election results were released, but took another step lower following John Key’s resignation.

All up, the NZD/USD has fallen around 50 points to 0.7080.

The NZ stock market also fell marginally, but most of this reaction appears to be in response to offshore events.

What does this mean for the economy?

For the remainder of the current parliamentary term (less than one year), the implications are quite minimal.

Surplus focus

Finance Minister Bill English, for example, has played a key role in the settings of fiscal and economic policy.

He and other senior ministers will remain as senior leaders guiding policy decisions.

The government’s policy settings have been focused on returning the Crown accounts to surplus, setting clear goals for government departments to achieve, and making policy changes incrementally.

There has been a focus on economic efficiency and on value for money out of government spending. Longer term, the broad economic strategy of the National Party will depend on the guidance of the new leader.

However, under a Bill English government (for example) the differences might not amount to much given the influence he has been having.

The fiscal viability of current New Zealand Superannuation would potentially be more open to debate, as Mr Key has long said he would resign rather than change the current scheme.

Some ambiguities

There is now greater uncertainty over economic policy for the next parliamentary term, mainly through greater uncertainty over which parties will form government.

Whether the probability of a change in government is increased or reduced will depend on the incoming Prime Minister.

Mr Key’s popularity with the electorate, and his ability to ‘sell’ policies, has been high, though after eight years at the top he is no longer a fresh face.

A National-led government in the next term would still be a largely known quantity, though its exact policies will still be influenced by its coalition partners.

A Labour/Green-led government’s policies have yet to be clearly defined this far out from the election but would tend to be more interventionist and more redistributive than the National-led government has been to date.

It is possible that business confidence will dip slightly in the short term, and the usual pre-election slowdown of business investment decisions may be larger than normal.

Sound fundamentals

Some economic fundamentals are sound: we expect economic growth to hit 3.5% annual average in late 2017.

Population growth is strong.

As a result, retail spending and construction growth are robust, with construction expected to continue contributing healthily to growth over the next couple of years.

A number of key export sectors are faring well, and the dairy sector can now look forward to better financial times through the recovery in dairy prices.

We continue to expect the Reserve Bank of New Zealand to leave the OCR on hold at 1.75%. New Zealand’s main economic risks remain potential shocks from overseas, particularly through the outcome of the US presidential election, the added political uncertainty generated by the resignation of Mr Renzi and geopolitical risks in general.

Nick Tuffley is Chief Economist at ASB. The above commentaries were written before Bill English was confirmed as the next Prime Minister.

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