Tourism TrumpingNick Tuffley – ASB Chief Economist

March 2017

2

Disclaimer

This document is a private communication and is not intended for

public circulation or for the use of any third party, without the

approval of ASB. The information contained in this document is

given with an express disclaimer of responsibility. No right of

action shall arise against ASB or its employees either directly or

indirectly as a result of this information. Those acting upon this

information do so entirely at their own risk. This information

does not purport to make any recommendation upon which you

may reasonably rely without taking further and more specific

advice.

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Topics

• Global outlook, key export sectors

• NZ economic growth overview

• Inflation, interest rates and NZD

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Dawning of a new world

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US Preside t Tru p’s pote tial poli ies• Fully policy details still to be announced.

• Cut personal income tax.

• Corporation tax to be reduced to 15% from 35%.

• Lift spending on domestic infrastructure.

• Review red-tape around the labour market and investment.

• Declare China as a currency manipulator.

• Increased protectionist policies.

• Tru p’s poli ies are ge erally o sidered to e i flatio ary.• The great unknown is the impact on global trade and growth.

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French Presidential election 2017

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French Presidential election 2017

• 2-step process

– Round 1: Sunday April 23. 11 candidates.

– If no candidate gains an absolute majority, a run-off is held:

– Round 2 Sunday May 7, with the top two facing off.

Round One Polls Round Two Polls

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Broad global outlook

-2

0

2

4

6

8

85 87 89 91 93 95 97 99 01 03 05 07 09 11 13 15 17

NZ TRADING PARTNER ANNUAL GDP GROWTH

Source: Consensus Inc, Stats NZ, ASB

aapc

Av erage

2017 & 2018:

Forecasts

2016 Estimate

-6

-4

-2

0

2

4

6

8

10

Dec-00 Dec-04 Dec-08 Dec-12 Dec-16

NZ TRADING PARTNER GDP GROWTH

Source: Consensus Inc, Stats NZ, ASB

Asia ex-Japan

US

Australia

aapc

Euro area

9

Milk price forecast

• We revised our forecast back

down to $6.00/kg, following

greater than expected

production through the NZ

summer.

• However, we remain

optimistic heading into next

season.

• We are forecasting $6.75/kg

for 2017/18.0

1

2

3

4

5

6

7

8

9

10

05 06 07 08 09 10 11 12 13 14 15 16 17 18 Long Run

MILK PRICE AND DIVIDENDS(per kg milksolid)

Source: Fonterra, ASB

$

ASB Milk Price forecasts

Milk Price

Dividend

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Tourism booming• Tourism numbers and spend

continue to lift strongly.

• Source of arrivals remains

broad, limiting risk of a

downturn.

• Capacity constraints could act

as a brake to growth.

170

190

210

230

250

270

290

310

05 06 07 08 09 10 11 12 13 14 15 16 17

NZ SHORT-TERM ARRIVALS(monthly, seasonally adjusted)

Source: Stats NZ

'000

Lions tour

RWC CWC

11

Tourism key markets

0

10

20

30

40

0

10

20

30

40

Jan 00 Jan 05 Jan 10 Jan 15

JapanChinaOther AsiaKorea

ASIAN VISITOR ARRIVALS

(Smoothed trend, 000's)

Source:StatsNZ, ASB

0

40

80

120

160

0

40

80

120

160

Jan 00 Jan 05 Jan 10 Jan 15

AustraliaAmericasEuropeAsia

VISITOR ARRIVALS(Smoothed trend, 000's)

Source:StatsNZ, ASB

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World Masters Games – Auckland April 2017

• April 21-30.

• 27,000 athletes. 16,000 international, vs

11,237 at Rio Olympics 2016.

• Most aged 40-59, ave. income NZD145,000.

• International athletes expected to spend 9

days on holiday in NZ, post 10 days of games.

• $30 et oost to Au kla d’s e o o y.• 244,000 visitor nights in Auckland.

• Potential for further lift to tourism outside

Auckland.

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British & Irish Lions Tour: 3/6 – 8/7

• 10 games– 3x Auckland, 2x Wellington,

1x Christchurch, Whangarei, Dunedin,

Rotorua, Hamilton (vs 11 in 2005).

Same number of tickets – 360k –available.

• 2005 tour saw additional 30,000

tourists (seasonally-adjusted), mostly

from Europe.

• NZ Treasury has warned GBP weakness

following Brexit could impact tourist

spend and tourist numbers.

• 2005 tour had economic benefit to NZ

of $135.2m (source: NZ Treasury).

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NZ Overview

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Strong population growth through migration

• Net migration at record highs.

• Fall in permanent departures

while Australian job

opportunities are muted.

• Increased permanent arrivals,

returning NZer’s from

Australia and skill shortages

attracting foreign labour.

• Students (Indian and Chinese)

as a % declining, replaced by

work visa entrants.

• Moderation expected, as Aus

outlook eventually improves

-40

-10

20

50

80

110

140

-40

-10

20

50

80

110

140

Jan-93 Jan-99 Jan-05 Jan-11 Jan-17

TOTAL MIGRATION(into NZ, annual totals)

Source: Stats NZ

'000s

Outflow

Inflow

Net Inflow

(f )

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Housing market

• House price growth started to

slow in Auckland from mid-

2016, slight falls in near term.

• Most regions seeing price

growth slow since restrictions.

• New restrictions: flat/falling

prices in late 2016/early 2017,

slight bounce in 2017H1.

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

Mar-06 Mar-08 Mar-10 Mar-12 Mar-14 Mar-16 Mar-18

REGIONAL HOUSE PRICE FORECASTS (annual growth)

AKL

CHCH

WGTN

Other

Nationwide

Source: QV, ASB(f)

ASB f /c

17

Growth moderated in 2015, back up in 2016-18

• 2016 saw some recovery from

a soft 2015, although growth

slowed into year-end.

• Low interest rates and past fall

in NZD will support growth

over 2017.

• Dairy recovery supportive.

• Population and income

growth to remain key supports

of NZ economy. -3

-1

1

3

5

7

-3

-1

1

3

5

7

Mar-89 Mar-94 Mar-99 Mar-04 Mar-09 Mar-14 Mar-19

NZ GDP GROWTH

Source: Stats NZ, ASB

%

(f)

%

Annual av erage %

Per quarter

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Inflation, financial markets

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Inflation: now back above 1%

-1

0

1

2

3

4

5

6

Jun-00 Jun-03 Jun-06 Jun-09 Jun-12 Jun-15 Jun-18

NZ CPI INFLATION

Source: Stats NZ, ASB

%

(f)

Annual %

quarterly change0

1

2

3

4

Mar-93 Mar-98 Mar-03 Mar-08 Mar-13 Mar-18

NZ CPI ANNUAL INFLATION3-year average

Source: Stats NZ, ASB

%

(f)

CPI Annual %

CPI Inflation Target Band

20

Interest rates low for a long time

• The OCR is comfortably on

hold now. High threshold for

further cuts.

• Market pricing of OCR hikes

partly reflects impact of

sudden change in global

outlook generated by Trump.

• We estimate the market has

got ahead of itself and pricing

will eventually soften to

reflect that.1.5

2.0

2.5

3.0

3.5

4.0

1.5

2.0

2.5

3.0

3.5

4.0

Sep-13 Aug-14 Jul-15 Jun-16 May-17 Apr-18 Mar-19

Source: ASB

% OCR FORECASTS

(ASB vs pricing of overnight index swaps) %

Current market pricing

ASB Economics Forecast (peak of 3.5% in 2022)

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Summary

• International events likely to have a big influence on 2017.

• NZ economy set to pick up to 3.5% growth over 2017 & 2018.

• Tourism buoyant, but capacity constraints may limit growth.

• Growth will be supported by migration flows, construction, low

interest rates, real wage growth, tourism and dairy recovery.

• Key risks: Trump; Brexit fallout; European elections; higher NZD.

• Inflation expected to remain comfortably above 1%, but

downside risks remain.

• The RBNZ is expected to hold the OCR at 1.75% for the

foreseeable future. Market slightly ahead of itself.