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Budget Policy Statement 2012

Economic Context

The New Zealand economy continued its expansion in 2011. The economy has now grown in nine of the past 10 quarters, despite a number of factors weighing on this growth, including the European sovereign debt crisis and the Canterbury earthquakes. An increased level of household saving has also weighed against economic activity in the short term, although it is a necessary foundation for more sustainable growth in the medium and longer terms.

Looking ahead, New Zealand faces a set of circumstances and opportunities that provide impetus for solid growth over the next four years. The rebuilding of Christchurch will be a key driver of domestic activity and is expected to add 1¼ percentage points to annual growth in each of the 2012 to 2016 calendar years. New Zealand's two largest trading partners - Australia and China - are forecast to maintain strong growth rates. The terms of trade, although expected to weaken, will remain at historically elevated levels on the back of demand from emerging markets for our major export commodities.

A summary of the Treasury's updated economic forecasts can be found in the accompanying Economic Outlook. These show weaker trading partner growth than was forecast in the Pre-election Update, particularly in the near term, as a result of the ongoing turmoil in Europe. In addition, the earthquakes of 23 December 2011 and subsequent seismic activity have led the Treasury to push out the anticipated impact of some Christchurch rebuilding activity which was expected to occur this year.

As a result, growth is expected to be somewhat weaker in the near term than was previously forecast but to pick up over time. Growth in the year to March 2012 is now expected to be 1.9 per cent, down from 2.3 per cent in the Pre-election Update. Growth in the year to March 2013 is expected to be 2.8 per cent (down from 3.4 per cent) and in the year to March 2014 expected to be 3.8 per cent (up from 3.3 per cent).

Despite these weaker near-term forecasts, New Zealand is still expected to grow more strongly over the next two years than the euro area, the United Kingdom, Japan, the United States and Canada.

There are risks to these forecasts, however. Global growth could be weaker than the Treasury and others are forecasting, depending on how effective European policymakers are in addressing the debt and economic growth challenges that face the euro area. There is also a real possibility that the European crisis could lead to another global recession. Further seismic activity in Christchurch could also push rebuilding activity back further.

A full Economic and Fiscal Update will be provided with Budget 2012.

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