Numbers and Reality are two different things

Dominick Stephens and Imre Speizer

Monarch Maker

As expected, the General Election delivered no clear outcome – neither the centre-right bloc (National and ACT) nor the centre-left bloc (Labour and Green) has the numbers to form a Government. This leaves the centrist and nationalist New Zealand First Party in a monarch-maker position.

However, we think that the results make a National/New Zealand First Government the more likely outcome. The party vote was similar to the most recent polls, which had shifted in favour of National.

However, there are still around 384,000 special votes to be counted (15% of the total).

Historically, a greater proportion of special votes have been for Labour and the Greens, compared to the vote count on election day. National’s election day tally this year would translate to 58 seats in a Parliament of 120.

Based on historical trends, political analysts have suggested that this could drop to 56 seats after special votes are counted, while Labour and the Greens could gain two seats between them.

Balance of Power held

However, even a two-seat swing would not change the fundamental features of the result – New Zealand First would still hold the balance of power. The big surprise of the night was that the Maori Party (a support partner of the incumbent National Government) lost its electorate seats, leaving it ineligible for any seats in Parliament.

New Zealand has not seen an election outcome of this kind for many years.

In every election since 1999, the largest party has had a range of smaller parties that it could realistically work with, giving it options for forming a Government.

This time is different.

The large parties have no real options, so more of the negotiating power lies with a smaller party. We should begin the discussion of coalition possibilities by stating that although a National /Green partnership is arithmetically possible, it is politically infeasible – indeed, the Greens’ leader has already all-but ruled it out.

Three-Party combo

That leaves two possible governing combinations – National/NZ First or Labour/Green/ NZ First. A Labour/Green/NZ First Government seems the less likely option.

Each piece of legislation would require the ascent of all three parties – an extremely tricky proposition given the diametrically opposed policy priorities of NZ First and the Greens.

We view a National/NZ First deal as the more likely outcome.

It could take two possible forms. The first is a formal coalition Government, where NZ First ministers have places in Cabinet.

Two-Party Scenario

The second possibility is a National Minority Government, with NZ First agreeing to vote with the Government on confidence and supply in return for specific policy concessions. NZ First would not be represented inside Cabinet, but might hold senior ministerial posts outside Cabinet. This would leave NZ First free to vote against the Government on policy areas not covered by their confidence and supply agreement.

It would also leave the National Party free to seek support from the Greens or Labour if New Zealand First was not willing to vote with National on a particular issue. Either way, New Zealand First would have a significant influence on policy.

How would a possible National/NZ First Government affect economic forecasts? At this point, assessing what the election means for economic forecasts is very tentative at best!

Even if National and NZ First do form a Government as expected, we cannot tell exactly which aspects of NZ First’s wide-ranging policy platform will have an influence on policy.

Immigration Policy

A key NZ First policy platform is to tighten immigration restrictions – the NZ First leader has stated he would prefer net immigration of 10,000 per annum, compared to over 70,000 per annum presently. Net immigration has already started to fall, and we are already forecasting that it will drop to 20,000 by the end of 2020. If some policy change prompted us to forecast a steeper decline in net immigration, we would also consider reducing our GDP growth forecast.

House Prices

We suspect that if a National/NZ First Government is formed, the housing market will react positively; that is, turnover will pick up and prices will be higher than otherwise.

True, NZ First favours lower immigration and restrictions on foreigners’ ability to buy property. If implemented, such policies would tend to reduce house prices.

But those policies pale in comparison to the potential impact on house prices that Labour’s proposed tax changes might have had. There may be a short-term ‘relief’ bounce in the housing market now that capital gains tax is off the table for at least another three years.

New Zealand has not elected a fifth-term Government since 1925, and neither of the previous partnerships between NZ First and a major party was returned for a second term in office. Property investors will therefore be sensitive to the possibility of a change of Government in 2020, and the tax changes that could herald.

Dominick Stephens is Chief Economist and Imre Speizer is Senior Market Strategist at Westpac.

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