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Budget 2016 Home Page Fiscal Strategy Report - Budget 2016

Economic Context

The outlook for the economy is positive (Table 1). Latest GDP figures show real GDP grew 2.5 per cent in the year ended December 2015, a little stronger than anticipated in the Treasury's Half Year Update.

The Treasury's Budget Update forecasts real GDP growth of around 2.9 per cent over the coming year, and 2.8 per cent on average over the five years to June 2020 (Figure 1). This period of growth is expected to reduce the unemployment rate to below 5 per cent in 2018.

Figure 1 - Real GDP growth
Figure 1 - Real GDP growth.
Sources: Statistics New Zealand, The Treasury

Consumer spending and services exports are two key factors driving economic growth, supported by ongoing strength in net migration and tourism. Further impetus is apparent in a large pipeline of construction projects, and low interest rates should continue to stimulate spending and investment activity.

Global trading conditions, however, remain challenging (Figure 2). The outlook for trading partner growth has deteriorated since the Half Year Update in December and export commodity prices, particularly for dairy products, remain soft.

Figure 2 - New Zealand and trading partner GDP growth
Figure 2 - New Zealand and trading partner GDP growth.
Sources: IMF, The Treasury

Inflation is currently low but is forecast to reach 2 per cent in 2017 (Figure 3).

Figure 3 - CPI inflation
Figure 3 - CPI inflation.
Sources: Statistics New Zealand, The Treasury

The pace of real GDP growth over the second half of 2015 has contributed to a significantly higher level of nominal GDP and tax revenue than was expected in the Half Year Update (Figure 4). Compared to the Half Year Update, nominal GDP is forecast to be a cumulative $17.3 billion higher over the five years to June 2020.

Figure 4 - Change in nominal GDP since the Half Year Update
Figure 4 - Change in nominal GDP since the Half Year Update.
Sources: Statistics New Zealand, The Treasury

As usual, there are many uncertainties and risks around this outlook. A number of these are external and beyond the direct reach of New Zealand policy-makers, reinforcing the need for prudent fiscal policy. There are ongoing questions about China's transition to consumption and service sector growth, and many countries are struggling to exit the low-growth, low-inflation path they have experienced since the global financial crisis. The magnitude of New Zealand's net migration inflows, house price inflation and construction cycle could also differ from those assumed in the forecasts.

Table 1 - Summary of the Treasury's Economic Forecasts in the Budget Update
June years 2015
Actual
2016
Forecast
2017
Forecast
2018
Forecast
2019
Forecast
2020
Forecast
Real GDP growth (annual average
% change)
3.3 2.6 2.9 3.2 2.8 2.5
Consumers price inflation
(annual % change)
0.4 0.1 1.5 2.0 1.9 2.1
Unemployment rate (June quarter) 5.9 5.6 5.6 5.1 4.6 4.6
Current account (% of GDP) -3.5 -3.5 -4.6 -4.1 -4.3 -4.8

Sources: Statistics New Zealand, the Treasury

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