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The people have spoken.

Saturday’s General Election saw the balance of power in New Zealand’s political landscape shifting to the right, with the National party set to lead the next government. National will need the support of at least the ACT party, and potentially New Zealand First. However, it will take several weeks before the exact shape of the new Government will be known.

Saturday’s New Zealand General Election saw a significant 19% swing to the right compared to the 2020 election. The key gainers were the centre-right parties of National and ACT won a combined 61 seats. On the centre-left, Labour lost heavily, and the Greens and Te Pāti Māori gained ground. Te Pāti Māori did particularly well in the electorates at Labour’s expense.

At present it seems likely that the next parliament will contain 122 seats – 121 allocated from the General Election and an additional 1 seat to be added following the Port Waikato by-election on 25 November (almost certain to be won by National). Importantly, once an estimated 567,000 special votes are counted, history suggests that National will drop 1-2 seats to the centre-left grouping. As a result, when all said and done, National and ACT are likely to finish with 60 or 61 seats in the new parliament – insufficient to command a majority. Hence the support of the NZ First Party will likely be needed to achieve a working majority.

The outcome of special votes and hence the official result will not be known until November 3 which will likely delay substantive coalition negotiations. Comments from the centre-right leaders suggest constructive coalition negotiations. National and ACT appear interested in dealing with NZ First, and NZ First have indicated an interest in helping National/ACT– although the details will matter.

Regardless of the exact form of the governing arrangement that transpires, we can assume that the two minor parties will want some policy “wins” to demonstrate to their respective supporters. There is a high degree of commonality among the right of centre parties around the ideas of:

tax bracket adjustments (NZF favour a zero-rate bracket for incomes <$14,000).
easing of tax obligations on property investors.
reduced regulatory constraints on farmers.
redistribution of carbon tax income to taxpayers.
focusing the RBNZ on inflation control rather than its current dual mandate.

The key differences relate to the extent of spending cuts to be pursued (ACT and NZF generally favour greater government spending cuts) and the extent to which revenue from National’s proposed tax on homes bought by foreigners can be relied on to fund tax cuts. NZF has been concerned that the PREFU fiscal projections are too optimistic (which we agree with) and that spending initiatives will need to be scaled back in coalition negotiations.

But NZ First has a few higher-cost spending initiatives in its manifesto that it may require to be funded to get their support. Should perhaps one of these need to be accommodated, then it is possible that an additional $1-5 bn of baseline spending cuts might be required over the period to 2026/27 (there are still unallocated operating allowances within National’s fiscal plan, but utilising those would leave almost no room for additional spending initiatives over the next three years). The bottom line is more spending cuts may need to be agreed to get the coalition across the line.

We think that ACT’s requirements may be easier for National to agree to and should result in a more contractionary stance relative to the PREFU/National’s fiscal plan. Adding these requests to those of NZF probably will lead to a more contractionary fiscal stance than National indicated during its campaign.

There could be interest rate implications from a significant change in the fiscal stance but it’s hard to see these materialising in the near term. Hence the RBNZ likely won’t have much new information on the fiscal outlook at the time of its November 29 Monetary Policy Statement.

Financial market volatility may be slightly elevated as coalition negotiations evolve. However, centre-right’s strong performance on the night will help to assuage some uncertainty.

Find further coverage of our early take on the election result, and the process that now lies ahead as National seeks to form a government, in our recent bulletin.

Migration inflation continuing to break records.

Since late last year, migrant arrivals have surged in New Zealand. Indeed, new estimates released this week suggests that the surge has been even larger than thought previously. In seasonally adjusted terms, on net, almost 10,000 people arrived in New Zealand in August. Moreover, arrivals in the year to July are around 7,000 higher than previously estimated. That’s meant that the annual inflow grew to over 110,000 in the year to August – a new record and sufficient to lift annual population growth to a considerable 2.5%. To date the inflow seems to be helping to alleviate tightness in the labour market – helping to explain reports of record applications for the jobs on offer – while also underpinning a lift in house sales, prices and especially rents. How these competing influences on the economy and inflation continue to play out will have an important bearing on the required level of interest rates over the year ahead. Given the increasing size of this inflow, understanding the economic impact has certainly become more important than ever.

Despite these strong migrant inflows, the modest recovery in the housing market appears to have taken a breather in September. Our seasonal adjustment indicates that the number of house sales fell by around 3% during the month. As a result, sales were just 5% higher than a year earlier and remain low by historic standards. Meanwhile, we estimate that prices increased just 0.1% in the month – the smallest increase since April. We suspect that the proximity of the impending General Election will have dampened activity during the month, and this is also likely to be evident when October data are released next month. An informed read on housing market trends will probably not come available until the summer selling season kicks off in earnest once people return from the Christmas holiday period.

Sticky core.

The key risk event in New Zealand this week is release of the September quarter CPI. Following last week’s softer-than-expected news regarding food prices and rents, we have slightly lowered our forecast and now expect the headline index to post a 1.9% lift in the quarter. That would see annual headline inflation edging gown down 0.2ppts to 5.8%.

The large quarterly increase that we foresee over the September quarter owes in part to a big seasonal lift in local council rates, while the annual increase in excise tax on alcohol will also take effect this quarter. Of course, the other special factor this quarter is a near 17% rebound in fuel prices. Importantly, reflecting our sense of ongoing momentum across the service sector, we expect that non-tradeable prices will rise by 1.7% during the quarter. While this would reduce the annual non-tradables inflation rate by 0.3ppts to 6.3%, this would leave it far above levels consistent with achieving the 1-3% inflation target.

Our forecast for headline inflation is 0.2ppts below the estimate published by the RBNZ in the August Monetary Policy Statement, which may reflect a decline in food prices since the RBNZ made its forecast. More importantly, our forecast for non-tradeable inflation is in line with that made by the RBNZ. A material upside surprise, especially to non-tradables inflation, would increase the likelihood that the RBNZ will feel compelled to lift the OCR further next month, especially coming after the upside surprise in the June quarter. On the other hand, the market may well breathe a sigh of relief should inflation print in line with our expectations or lower. We doubt that such a print would fully assuage the RBNZ’s concerns about whether inflation will return to the target range quite as quickly as it had forecast in August, although it may lift the bar for a rate hike as soon as the November meeting. That said, there is plenty of additional economic data to be released in coming weeks, notably the September quarter labour market data on 1 November. And assuming a government is formed, the fiscal policy intentions of that government will also have a bearing on whether the RBNZ views further policy tightening to be warranted.

Westpac New Zealand Economics

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