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Budget Policy Statement 2017

Economic and Fiscal Outlook

The outlook for the economy continues to improve

New Zealand continues to make good economic progress at a time when many other countries are grappling with low growth, fiscal deficits and a range of other risks and challenges.

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

The economy is expanding at a solid rate and the outlook is for sustained economic growth into the future. This is supported by high levels of construction activity, exports (particularly tourism), a growing population and low interest rates.

The Kaikōura earthquakes last month caused significant damage and will affect economic activity in the region. However, this is not expected to disrupt the overall momentum of the national economy.

The Treasury's latest economic forecasts in the 2016 Half Year Update show an even more positive outlook than those in Budget 2016 (Table 1).

Real GDP growth is expected to average around 3.5 per cent over the next two years, and 3 per cent over the five year forecast period. In total, the Treasury expects nominal GDP to be $23.7 billion higher cumulatively across the four years to June 2020, compared with Budget 2016 forecasts.

Table 1 - Comparison of the Treasury's growth forecasts between
Half Year Update
and Budget Update
June years 2016
Actual
2017
Forecast
2018
Forecast
2019
Forecast
2020
Forecast
2021
Forecast
Real GDP (annual average % change)
Half Year Update 2.8 3.6 3.5 2.9 2.4 2.3
Budget Update 2.9 3.2 2.8 2.5  
Change 0.7 0.3 0.1 -0.1  
Nominal GDP ($ billions)
Half Year Update 251.8 264.8 279.5 293.4 305.5 317.4
Budget Update   259.2 273.6 287.4 299.2  
Change   5.6 5.9 5.9 6.3  

Sources: The Treasury, Statistics New Zealand

This stronger growth is expected to support an additional 150,000 jobs by 2021, on top of the 250,000 jobs created in the past three years. Unemployment is forecast to fall to 4.3 per cent over the next three years, and the average annual wage is expected to continue to rise faster than inflation - up to $66,000 by 2020/21.

The New Zealand economy is expected to grow more strongly over the next few years than many other developed economies, including the Euro area, the US, Australia, the UK, Japan and Canada.

One source of risk to this outlook is the global economy. Global growth is still low and there are further risks going forward. These risks include the impact of Brexit on the UK and European Union; ongoing imbalances in the Chinese economy; the impact of Australia's transition from mining investment; and future developments around global trade integration.

Table 2 - Summary of the Treasury's economic forecasts
June years 2016
Actual
2017
Forecast
2018
Forecast
2019
Forecast
2020
Forecast
2021
Forecast
Real GDP (annual average % change) 2.8 3.6 3.5 2.9 2.4 2.3
Consumers Price Index (annual % change) 0.4 1.5 2.0 2.1 2.0 2.1
Employment growth (annual average % change) 2.3 4.8 1.6 1.5 1.1 0.9
Unemployment rate (June Quarter) 5.0 4.8 4.6 4.2 4.3 4.3
Wage growth (annual % change) 2.1 1.6 2.2 2.8 3.1 3.0
Current account (% of GDP) -2.9 -3.0 -3.8 -4.1 -4.4 -4.4

Sources: The Treasury, Statistics New Zealand

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