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Budget 2017 Home Page Fiscal Strategy Report - Budget 2017

Economic Context

The economic outlook is positive, supported by exports (particularly tourism), construction activity, high levels of inward migration, and low interest rates.

Real GDP grew 3.1 per cent in the year ended December 2016. Annual economic growth is forecast to average over 3 per cent over the next four years, peaking at around 3.8 per cent in 2019 (Figure 1).

Figure 1 - Real GDP growth
Figure 1 - Real GDP growth.
Sources: StatsNZ, the Treasury

Over this period, employment is forecast to continue to grow strongly, with the number of people employed increasing by 215,000 over the forecast period, while unemployment is forecast to gradually decline. Wages are forecast to grow over the forecast period, with average wages expected to be over $64,000 by the end of the forecast period (Figure 2).

Figure 2 - Employment and wages
Figure 2 - Employment and wages.
Sources: StatsNZ, the Treasury

Consumer price inflation is expected to pick up over the forecast period as spare capacity is used up, stabilising around an annual rate of 2 per cent (Figure 3).

Figure 3 - CPI inflation
Figure 3 - CPI inflation.
Sources: StatsNZ, the Treasury

The strong outlook for real GDP growth, along with an improved terms of trade, helps drive a significantly higher level of nominal GDP than was expected in the Treasury's Half Year Update. Compared with the Half Year Update, nominal GDP is forecast to be a cumulative $23.9 billion higher over the five years to June 2021. The current account deficit is expected to widen but remain below 4 per cent of GDP.

New Zealand's net international investment position has improved significantly since 2009: from a net liability position of 84 per cent of GDP in early 2009 to a net liability position of around 60 per cent of GDP at the end of 2016. Over the forecast period, the net international investment position is expected to remain broadly stable as a percentage of GDP.

Figure 4 - New Zealand and trading partner GDP growth forecasts
Figure 4 - New Zealand and trading partner GDP growth forecasts.
Sources: IMF, the Treasury

Continued global risks underline the need for maintaining prudent fiscal policy. Growth has slowed in Australia but this has been offset by faster growth in other advanced economies. Uncertainty remains around Brexit, the continued imbalances in the Chinese economy and future US economic, trade and fiscal policy. Domestically, net migration flows, house price inflation and the construction cycle could also differ from those assumed in forecasts.

Table 1 - Summary of the Treasury's economic forecasts in the Budget Update (BEFU)
Year ended 30 June 2016
Real GDP growth (annual average % change) 2.7 3.1 3.5 3.8 2.9 2.4
Consumer price inflation (annual % change) 0.4 1.8 1.6 2.1 2.2 2.1
Unemployment rate (June quarter) 5.0 5.0 5.0 4.6 4.3 4.3
Current account (% of GDP) -2.9 -2.8 -3.0 -3.3 -3.7 -3.9

Sources: StatsNZ, the Treasury

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