Economic Context
The New Zealand economy continued its moderate expansion in 2012. Since the lowest point of the recession, in the June quarter of 2009, the economy has grown at an average of 2 per cent a year in real terms.
That growth has been achieved despite considerable headwinds. In particular, the Global Financial Crisis has had a profound effect on economies in the developed world. An increased level of household saving in New Zealand 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, the European sovereign debt crisis and ongoing fiscal and debt problems in the United States are risks to the global recovery. Forecasts of growth in the world's largest and most developed economies have recently been revised downwards. Global factors will continue to affect New Zealand, which makes up just a quarter of 1 per cent of the world economy.
Yet compared to many other countries, the New Zealand economy is in good shape. The Half Year Economic and Fiscal Update shows the economy growing at an average 2.5 per cent each year over the forecast period. This compares with forecast growth of 3 per cent, on average, in the 2012 Budget Economic and Fiscal Update.
Despite growth forecasts being slightly weaker than in Budget 2012, New Zealand is still expected to grow more strongly over the next four years than the euro area, the United Kingdom, Japan and Canada.
From 2014, New Zealand's current account deficits are forecast to be slightly smaller than in Budget 2012. The deficit is forecast to be 4.6 per cent of GDP in the year to March 2014, or 3.2 per cent of GDP when the impact of the Canterbury rebuild is excluded.
At present, the labour market remains weaker than the Government would like, but the forecasts in the Half Year Economic and Fiscal Update show this turning around, with employment increasing and the unemployment rate falling to below 6 per cent in 2015.
New Zealand has a number of positive opportunities over the next decade.
Our trade and investment links are increasingly with Asia - one of the fastest growing regions of the world. In the next five years, developing countries in Asia such as China, India and the ASEAN countries will increase their share of world GDP by nearly 20 per cent.
Our terms of trade, despite coming off near-record levels as global growth slows, remain high. Our businesses are becoming more competitive. And the Christchurch rebuild is forecast to contribute 0.7 per cent a year to growth over the next few years.
New Zealand is in a strong position to translate those opportunities into more jobs, higher incomes and better living standards for New Zealand families. The Government's economic and fiscal programme is aimed squarely at ensuring this happens.
