iPredict Election Update #36

Key Points:

* OCR expected to be increased as early as September and reach 3.50% in April
* Mortgage rates strongly expected to reach 6% in 2011
* Banks, Dunne, Sharples, Turia and Harawira all expected to win seats
* New Zealand First still above MMP’s 5% threshold
* John Key’s National Party to govern with Act and either the Maori Party or UnitedFuture

Commentary:

There is an expectation that the OCR will increase earlier and more frequently than previously indicated, according to this week’s snapshot from New Zealand’s prediction market, iPredict. Consequently, there is an increased likelihood that mortgage rates will reach at least 6.00% before the end of the year, while other economic indicators have broadly remained the same. 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 23% probability that Winston Peters will return to Parliament. Even taking into account New Zealand First’s current forecast share of the party vote, John Key is still strongly favoured to remain Prime Minister, and would be able to govern with the support of the Act Party and one of the UnitedFuture or Maori parties.

Economic Context

Expectations for GDP growth have remained steady this week. Growth over the next four quarters is expected to be 0.6% for the June quarter, 0.8% for the September quarter, 0.7% for the December quarter and 0.6% for the March 2012 quarter. Forecast unemployment has also remained steady. Unemployment is expected to be 6.4% in the June 2011 and September 2011 quarters, 6.1% in the December 2011 quarter and 6.2% in the March 2012 quarter.

Inflation expectations have marginally increased in the short term. Annual inflation is expected to be 5.1% in the September 2011 quarter (up from 5.0% last week), 2.9% in the December 2011 quarter (steady) and 2.6% in the March 2012 quarter (steady).

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 26% (down from 27% last week), the probability it will exceed $2.40 per litre is 12% (steady), and the probability it will go above $2.50 per litre is 10% (steady).

The market now expects Reserve Bank Governor Alan Bollard to increase the OCR earlier and more frequently than previously indicated. The OCR is predicted to remain at 2.50% until September when there will be an increase to 2.75%. It will remain at 2.75% through to December 2011, when it is expected to rise to 3.00%, 3.25% in March 2012, and then to 3.50% in April 2012.

The expected 90-day bank bill rate for 1 September 2011 is 2.87% (up from 2.82% last week) and for 1 December 2011 is 3.02% (up from 2.96% last week). There is an 87% probability that average floating-rate mortgages will reach 6.00% by the end of the year, up from an 84% probability last week, and a 25% probability that they will reach 6.50% in 2011, up from 20% last week.

The market is indicating a Current Account deficit of 5.04% of GDP for the year to June 2011 (steady compared with last week), 4.81% of GDP for the year to September 2011 (up from 4.57% last week), and 4.26% of GDP for the year to December 2011 (steady compared with last week).

Parties & Personnel

All current leaders of parliamentary parties have at least a 90% probability of remaining in their positions until the election. The most vulnerable is Labour Party leader Phil Goff, but with just a 10% probability of being replaced prior to the election (down from 12% last week).

Key Electorate Contests

Act has a strengthened position in Epsom this week with a 90% probability (up from 86% 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 74% probability of being re-elected (up from 72% 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% (compared with 5.0% last week), but the market also predicts that party leader Winston Peters has only a 23% probability of returning to Parliament (up from 22% last week).

Expectations that Mana Party leader Hone Harawira will retain the Te Tai Tokerau seat in the General Election have remained steady at 81%.

Maori Party Co-Leader Pita Sharples is expected to retain Tamaki-Makaurau (66%, up from 65% last week), Co-Leader Tariana Turia is expected to retain Te Tai Hauauru (79%, down from 80% last week), and Te Ururoa Flavell is expected to retain Waiariki (72%, steady).

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 remained steady at 66%.
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 is steady at 66%. There is a 77% probability that National’s Nikki Kaye will retain Auckland Central (steady compared with last week). National’s Paula Bennett remains only marginally favoured to retain Waitakere (52%, steady) 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

The two main parties forecast party votes have both increased this week. Forecast party vote shares are now: National 44.5% (up from 44.0% last week), Labour 31.9% (up from 31.4% last week), the Greens 7.2% (up from 7.0% last week), New Zealand First 5.1% (up from 5.0% last week), Act 4.9% (up from 4.5% last week), UnitedFuture 2.3% (up from 2.2% last week), the Maori Party 1.9% (down from 2.0% last week), the Mana Party 1.7% (down from 1.8% last week), the New Citizen Party 0.4% (steady) and the proposed Reform New Zealand Party 0% (steady).

Based on this data, and the electorate results above, Parliament would be as follows: National 54 MPs, Labour 38 MPs, the Greens 9 MPs, Act 6 MPs, New Zealand First 6 MPs, the Maori Party 3 MPs, UnitedFuture 3MPs 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 John Key’s National Party could govern with the support of the Act Party and either UnitedFuture or the Maori Party.

Given New Zealand First’s proximity to MMP’s 5% threshold, iPredict has also analysed what might happen should New Zealand First only win 4.9% of the vote. Under this scenario, Parliament would be as follows: National 57 MPs, Labour 41 MPs, the Greens 9 MPs, Act 6 MPs, the Maori Party and UnitedFuture 3 MPs each 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. John Key’s National Party would require the support of the Act Party or UnitedFuture and the Maori Party.

Overall the market continues to indicate an 88% probability there will be a National Prime Minister after the election (steady compared with 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 77%, steady from last week.

iPredict is owned by Victoria University of Wellington. Details on the company and its stocks can be found at www.ipredict.co.nz The company is providing full election coverage this year, with contract bundles for the party vote and for every electorate race in the country now available for trading, along with other contract bundles on a wide range of economic, political and social issues. The weekly political snapshot is taken at a random time each week to avoid market manipulation by political parties or activists. This week’s was taken at 8:39 am today.