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Budget 2011 Home Page Budget Economic and Fiscal Update 2011

Economic and Fiscal Outlook

The New Zealand economy has been more subdued than we had anticipated in December's Half Year Update (Figure 1.1). Economic growth slowed sharply in mid-2010 and real GDP in the December 2010 quarter was just 0.8% higher than a year earlier. By comparison, the average increase across the OECD was 2.9% over the same period. The weakness of the New Zealand economy has largely reflected households and businesses being cautious in their spending and investment, opting instead to increase saving and strengthen their financial positions in the wake of the global financial crisis. At the same time, an elevated New Zealand dollar against most major currencies has also limited the ability of the tradable sector (exporters and import-competing firms) to drive overall growth higher.

Figure 1.1 - Real production GDP
Figure 1.1 - Real production GDP.
Sources: Statistics New Zealand, The Treasury

There were signs of the economy regaining momentum in early 2011, but this was disrupted by the tragic events in Canterbury on 22 February. A recovery in activity is now expected from mid-2011, with economic growth rising to 1.8% in the year to March 2012 and peaking at 4.0% in the year to March 2013. Higher growth in consumer spending is expected as households become more comfortable with the state of their own balance sheets and as incomes rise more strongly alongside an improving labour market. Domestic demand will also be supported as the recent increases in commodity prices flow through the wider economy. The exchange rate is forecast to remain elevated in the near term and thus remain a constraint on export growth, before falling owing to fundamental forces such as New Zealand's high level of international indebtedness and a recovering global economy. A lower New Zealand dollar will then boost export volumes, particularly service exports such as tourism. These factors are expected to provide an offset to a withdrawal of monetary stimulus and tighter fiscal policy from 2012/13, including lower growth in government consumption as operating allowances are reduced (Figure 1.2).

Figure 1.2 - Components of real GDP growth
Figure 1.2 - Components of real GDP growth.
Sources: Statistics New Zealand, The Treasury

The impact of the Canterbury earthquakes plays a major part in the economic cycle, from the initial disruption, which delays the recovery, to the positive impact of the rebuild to regain what was lost, which amplifies the expansion. The rebuilding of Canterbury is expected to get firmly underway from 2012, which will cause the upswing in national investment to be much stronger than would have been forecast in the absence of the earthquake.

While the annual current account deficit is forecast to rise above 6% of GDP by late 2013, this is largely driven by investment, including for the Canterbury rebuild. National saving rates are expected to rise as a result of a return to Budget surplus and a higher household saving rate. The forecast economic recovery is expected to be far less reliant on debt-funded household consumption and investment than was the case in the mid-2000s.

Table 1.2 - Economic forecasts1
(Annual average % change,
March years)
2010
Actual
2011
Forecast
2012
Forecast
2013
Forecast
2014
Forecast
2015
Forecast
Private consumption 0.4 1.5 1.4 2.6 3.4 2.9
Public consumption 0.2 2.4 1.0 -0.8 -0.4 0.6
Total consumption 0.4 1.7 1.3 1.8 2.5 2.4
Residential investment -13.0 0.9 0.8 53.5 17.4 2.7
Market investment -10.0 7.5 4.3 13.0 9.8 2.5
Non-market investment -5.6 -5.2 10.0 -6.7 -3.1 4.7
Total investment -9.4 5.3 5.6 18.8 11.0 3.0
Stock change2 -2.2 1.8 0.0 -0.4 -0.2 0.0
Gross national expenditure -3.6 4.5 1.7 5.3 4.5 2.5
Exports 4.6 1.9 3.0 2.9 2.2 2.1
Imports -9.4 10.5 2.5 6.9 6.8 1.7
GDP (expenditure measure) 0.7 2.1 1.6 4.0 3.0 2.7
GDP (production measure) -0.7 1.0 1.8 4.0 3.0 2.7
Real GDP per capita -1.9 -0.1 1.0 3.2 2.0 1.8
Nominal GDP (expenditure measure) 1.1 5.3 4.7 6.4 5.4 4.9
GDP deflator 0.4 3.2 3.1 2.3 2.4 2.1
Output gap (% deviation, March year)3 -1.0 -1.3 -1.1 0.0 -0.1 -0.2
Employment -1.3 0.9 1.1 2.5 1.8 1.3
Unemployment4 6.0 6.8 5.7 4.8 4.8 4.6
Nominal wages5 1.0 2.8 4.1 4.1 4.2 4.0
CPI inflation6 2.0 4.5 3.1 2.4 2.5 2.6
Merchandise terms of trade7 -7.5 10.4 -1.7 0.2 1.4 1.3
Current account balance
$billion -4.5 1.0 -8.4 -11.5 -15.6 -16.8
% of GDP -2.4 0.5 -4.1 -5.2 -6.8 -6.9
Net international investment position
% of GDP -86.0 -78.6 -79.1 -79.6 -82.2 -85.3
TWI8 65.3 67.2 66.7 64.5 60.3 56.0
90-day bank bill rate8 2.7 3.0 3.0 3.9 4.7 5.0
10-year bond rate8 5.9 5.6 5.7 5.7 5.9 6.0

Notes

  1. Forecasts finalised 13 April 2011 and include data up to 18 April 2011
  2. Contribution to GDP growth
  3. Estimated as the percentage difference between actual real GDP and potential real GDP
  4. Household Labour Force Survey, percent of the labour force, March quarter, seasonally adjusted
  5. Quarterly Employment Survey, average ordinary-time hourly earnings, annual percentage change
  6. Annual percentage change, actual CPI inflation for 2011
  7. System of National Accounts (SNA) basis, annual average percentage change
  8. Average for the March quarter, actual for 2011

A longer time series for these variables is provided on page 187.

Sources: Statistics New Zealand, Reserve Bank of New Zealand, The Treasury

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