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Budget 2009 Home Page Budget Economic and Fiscal Update 2009

Finalisation dates and assumptions for the forecasts

Economic and fiscal forecasts - finalisation dates
Economic data 17 April
Economic forecasts 18 April
Tax revenue forecasts 23 April
Fiscal forecasts 5 May
Text finalised 20 May

Economic Forecast Assumptions

Trading partner growth - Consensus forecasts for economic growth in New Zealand's top 12 trading partners continued to be revised down in 2009. In anticipation of further revisions, we have reduced the March Consensus forecasts from -1.8% and 2.1% in calendar 2009 and 2010 (respectively) to -2.5% and 1%. Growth is then assumed to recover to 2.2% in 2011 and 3.8% in 2012. Given the considerable uncertainty around these numbers we consider scenarios based on different rates of world growth.

Figure 1.21 - WTI oil prices
Figure 1.21 - WTI oil prices.
Source:  Datastream, the Treasury

Global inflation and interest rates - Both inflation and interest-rate projections have been revised lower in these forecasts as inflation pressures have eased and the outlook for economic activity has declined further. Consumer prices are now expected to decline in the US and Japan in 2009 and inflation is expected to be low in the other major economies. Significant falls in commodity prices have contributed to the fall in consumer inflation. As a result, the outlook for interest rates has also been revised down and short-term rates are now expected to remain low for an extended period of time.

Oil prices - The average price of West Texas Intermediate (WTI) oil on a quarterly basis peaked at US$124/barrel in the June quarter of 2008 but had declined to US$43/barrel by the March 2009 quarter as demand fell with the slowing of the world economy. Based on the average futures prices for WTI oil in March 2009, it is assumed that the price of oil will gradually increase over time, reaching US$60/barrel by the end of 2010 and around US$68/barrel by the end of the forecast period. Over most of the forecast period the oil price assumption contained in the Budget Forecasts is approximately 20% below that assumed in the December Forecasts.

Terms of trade - The merchandise terms of trade (as measured in the System of National Accounts) are estimated to decline nearly 12% on an annual average basis over the March 2010 year. After reaching a low in the December 2009 quarter, the terms of trade are expected to recover by around 10% over the remainder of the forecast period when they will be nearly 10% below their March 2008 peak.

Monetary conditions - After having fallen 25% between the March 2008 and 2009 quarters, the New Zealand dollar exchange rate is assumed to appreciate to an average of 55.5 on the TWI in the June 2009 quarter before depreciating a further 11% to 49.5 by the beginning of 2010. The TWI is expected to end the forecast period around 52. Ninety-day interest rates are assumed to fall to 2.5% in the June quarter of 2009 and remain around this level for the best part of two years before increasing over the final two years of the forecast.

External migration - The net inflow of permanent and long-term migrants is assumed to increase from under 6,200 in the year to February 2009 to 10,000 per annum by mid-2010.

Policy and tax - The economic forecasts incorporate the decision to postpone the changes to personal tax rates and thresholds which were due to occur from 1 April 2010 and 1 April 2011. As a result, personal tax rates and thresholds are assumed to remain at their current rates and levels throughout the forecast period which ends in June 2013. The Emissions Trading Scheme is assumed to impact on stationary energy and liquid fuels from 1 January 2010 and 1 January 2011 respectively, as assumed in the December Forecasts. This scheme is currently under review but no decisions have been taken.

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