NEW ZEALAND ECONOMIC AND BANKING UPDATE Independent Schools of New Zealand 23rd March 2017

Good economic signals from our leading indicators GDP vs Confidence Composite – firms are still optimistic Financial conditions are still flagging reasonable momentum despite the high NZD Job ads are up strongly across the majority of New Zealand A high job vacancy rate flags continued falls in the unemployment rate Source: ANZ, Statistics NZ, RBNZ, Bloomberg

Housing is slowing and the outlook for dairying is better, but some other constraints are apparent Housing sector activity is responding to LVR restrictions and less credit availability Biggest problem facing businesses: skill shortages more to the fore Dairy prices have recovered strongly A mismatch between borrowing and deposit growth still needs to be reined in Source: ANZ, REINZ, Statistics NZ, RBNZ, GlobalDairyTrade

We continue to “like” medium term signals for New Zealand The terms of trade “correction” has been milder than initially feared and export commodity prices are now lifting Divergences between New Zealand and Australian participation rates tells a “policy” story No shortage of people wanting to come to New Zealand Inflation is in check; projected to rise slowly which means a more demure cycle for the OCR Source: ANZ, Statistics NZ, ABS, RBNZ

Forecast table Variable Forecast Comment Risk/Heat Map GDP 3.2% y/y for 2017 Q3 The economy is recording decent momentum, and we expect that to generally continue at least over the first part of 2017. Downside risk mainly stems from offshore. Unemployment rate 4.7% for 2017 Q3 We are looking through the Q4 lift in the unemployment rate. Job ads firmly signal it lower. Finding staff is a huge challenge for firms. OCR 1.75% by Sep 2017 With strong growth, capacity pressures emerging and inflation past its lows, further OCR cuts would now be hard to justify. Next move is up. CPI 1.9% y/y for 2017 Q3 Headline inflation is past its lows, with base effects seeing it return to the target mid-point early next year. Domestic and core inflation should also gradually lift. Neutral Negative Positive Neutral Negative Positive Neutral Down Up Neutral Negative Positive *The End*

Long Term Trends Growth and transformation of Asia Shift from Trade in Goods & Commodities to Data & Services Rise in power and influence of SME and the self-employed Ever increasing rise in consumer power and expectations

The changing face of Banking Regulators are asking banks to hold more capital The cost of domestic funding (customer deposits) is increasing; wholesale funding costs have stabilised but remain high Technology intensity of the industry has increased

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