Economic Context
The New Zealand economy continued to expand in 2012, growing by 3 per cent over the year to December. This growth rate, while moderate, was still one of the higher growth rates of countries in the Organisation for Economic Co-operation and Development (OECD).
Real wages are increasing and interest rates are at 50-year lows. There are 50,000 more jobs in the economy than two years ago, although unemployment remains too high and attracting new investment that creates jobs is a particular focus for the Government.
The expansion in economic activity has been achieved in the face, once more, of a turbulent world economic environment, and a high New Zealand dollar.
Looking ahead, Budget forecasts show annual growth of between 2 and 3 per cent over the next four years. Contributing to this growth are low interest rates, increased activity resulting from the Canterbury rebuild and strong commodity export prices. Business and consumer confidence have improved.
Trade and investment relationships with Asia, the fastest-growing region in the world, are increasing. Australia, New Zealand's largest trading partner, remains one of the stronger-performing developed economies.
The New Zealand economy is expected to grow more strongly over the next two years than many other developed countries, including the United States, Canada, the United Kingdom, Japan, and the Euro area.
The current account deficit is forecast to rise gradually to over 6 per cent of GDP in the next few years, driven by stronger investment by businesses and households, including investment in the Canterbury rebuild. If investment in the rebuild is excluded, the current account deficit remains below 5 per cent of GDP.
New Zealand's offshore net liabilities will also worsen slightly as insurance pay-outs for Canterbury continue. However, national saving is expected to rise, led by the Government getting its finances in order. Household saving rates are expected to retain the gains made over recent years, following the large dissaving over much of the 2000s.
In summary, New Zealand is well placed, although a number of risks and challenges remain. The recent drought, for example, may have a more persistent effect than expected. Rapid house price growth, if sustained, could spill over into increased spending and borrowing, placing unwanted pressure on the domestic economy.
Internationally, some of the more extreme downside risks for the global economy have receded and the situation overall is more balanced now than it has been for some time, although international conditions continue to place upward pressure on the New Zealand dollar.
