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Budget 2012 Home Page Budget Economic and Fiscal Update 2012

Economic Outlook

Overview

Over the past year, the New Zealand economy continued its recovery from the 2008/09 recession, registering 1.1% growth in the 12 months ending December 2011.[1]

Figure 1.1 - Real GDP growth
Figure 1.1 - Real GDP growth.
Sources: Statistics New Zealand, the Treasury

Factors facilitating this growth include strong merchandise terms of trade, good farming conditions, the Rugby World Cup (RWC) and an accommodating fiscal stance by the Government designed to underpin demand in the wake of the globalfinancial crisis and devastating natural disasters. Monetary policy has also been supporting activity through low interest rates.

This below-trend growth rate is reflected in elevated unemployment and weaker inflation. In the current June quarter, the consumers price index (CPI) is estimated to have risen at its lowest annual rate in over a decade.

The Treasury expects the pace of overall growth in gross domestic product (GDP) to continue strengthening. This process will be aided by a substantial employment and income impulse arising out of the Christchurch rebuild, the maintenance of historically low borrowing costs and - in the case of primary industry exporters – ongoing solid demand for New Zealand produce from key trading partners.

Not all sectors of the economy will benefit equally from the factors expected to underpin overall activity levels.

In the first part of the forecast period, non-commodity exporters are expected to continue to experience eroded competitiveness in the face of the strong exchange rate which will reduce their New Zealand dollar earnings. The tourism sector, in particular, is expected to face additional headwinds from weak income growth in a number of countries which are traditionally key sources of inbound tourists, the loss of infrastructure in Christchurch, and the effects of more New Zealanders taking advantage of the high value of the currency to holiday abroad instead of at home. In the broader retail sector, spending levels are expected to continue to be moderated by New Zealand households’ rising rate of saving in the face of high average debt levels.

Figure 1.2 - Real exchange rate and 90-day interest rates
Figure 1.2 - Real exchange rate and 90-day interest rates.
Source: Reserve Bank of New Zealand

Despite the increase in saving, the current account deficit is forecast to widen to 6.7% of GDP in the year ending March 2016, with a significant contribution from the Canterbury rebuild. An assumed weakening of the exchange rate towards the end of the forecast period returns the goods balance to surplus and helps the current account deficit narrow. Further adjustment is required beyond the forecast period for the deficit to return to a sustainable level.

International economy is more stable...

The economic outlook stabilised in the months following the publication of the Budget Policy Statement (BPS) earlier this year, but recent developments in Europe highlight the fragility of the outlook. Despite this uncertainty, on current readings of international and domestic indicators, New Zealand's economic outlook is relatively favourable.

Figure 1.3 - Trading partner growth
Figure 1.3 - Trading partner growth.
Sources: IMF, the Treasury

...but risks remain

Ongoing financial concerns in some European countries continue to be a potential source of adverse shocks to the world economy.

In the United States (US), the economic recovery could yet be undermined by political delays in reaching a credible medium-term path to fiscal sustainability.

The main threats to growth in China arise from the housing market, which became overheated following the rapid credit growth in 2009 and 2010 in response to the global financial crisis. In addition, China is Australia’s largest export market so events in China have significant direct implications for the economic prospects of Australia. Together, China and Australia account for around 35% of New Zealand’s merchandise exports.

Risks to the outlook from unanticipated developments internationally and domestically are explored in more detail in the Risks and Scenarios chapter.

Table 1.1 - Economic forecasts1
(Annual average % change,
March years)
2011
Actual
2012
Forecast
2013
Forecast
2014
Forecast
2015
Forecast
2016
Forecast
Private consumption 2.0 2.7 2.2 2.9 2.8 2.6
Public consumption 3.7 1.1 -0.8 0.1 0.7 0.6
Total consumption 2.4 2.3 1.5 2.2 2.4 2.2
Residential investment 4.4 -11.2 29.5 40.7 14.7 5.2
Market investment 9.6 6.0 7.4 14.1 6.3 2.2
Non-market investment -16.5 -7.4 5.4 3.3 5.6 3.4
Total investment 6.8 1.0 12.6 18.4 8.1 3.0
Stock change2 1.4 0.7 -0.7 -0.3 0.0 0.2
Gross national expenditure 4.6 2.4 3.7 5.8 3.9 2.6
Exports 1.9 3.0 2.1 1.0 2.1 2.1
Imports 10.5 5.2 2.8 8.5 4.9 1.7
GDP (expenditure measure) 2.0 1.5 2.9 3.4 3.0 2.8
GDP (production measure) 1.2 1.6 2.6 3.4 3.1 2.9
Real GDP per capita 0.0 0.8 1.8 2.4 2.1 2.0
Nominal GDP (expenditure measure) 5.9 4.2 4.1 6.5 5.4 4.9
GDP deflator 3.7 2.6 1.1 3.0 2.4 2.0
Output gap (% deviation, March quarter)3 -0.2 -1.0 -0.2 -0.6 -0.5 -0.1
Employment 1.2 1.3 1.3 1.6 1.6 1.4
Unemployment4 6.6 6.3 5.7 5.2 5.0 4.7
Participation rate5 68.6 68.3 68.2 68.2 68.2 68.4
Nominal wages6 2.6 3.2 3.8 3.9 3.7 3.5
CPI inflation7 4.5 1.6 2.6 2.5 2.4 2.4
Merchandise terms of trade8 9.9 1.3 -4.0 3.9 2.9 1.5
Current account balance            
  $billion -7.2 -8.7 -9.8 -13.5 -15.1 -16.8
  % of GDP -3.6 -4.2 -4.6 -5.9 -6.3 -6.7
Net international investment position            
  % of GDP -67.5 -72.1 -73.9 -75.3 -77.7 -80.8
TWI9 67.2 72.5 72.0 70.8 67.5 63.0
90-day bank bill rate9 3.0 2.7 2.9 3.6 4.1 4.4
10-year bond rate9 5.6 4.0 4.2 4.6 5.0 5.2

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

Notes:

  1. Forecasts finalised 27 April
  2. Contribution to GDP growth
  3. Estimated as the percentage difference between actual real GDP and potential real GDP
  4. Percent of the labour force, March quarter, seasonally adjusted
  5. Percent of the working-age population, March quarter, seasonally adjusted
  6. Quarterly Employment Survey, average ordinary-time hourly earnings, annual percentage change
  7. Annual percentage change, 2012 actual
  8. System of National Accounts (SNA) basis, annual average percentage change
  9. Average for the March quarter, 2012 actual

A longer time series for these variables is provided on page 132.

Notes

  • [1]Revised from 1.4% in the 15 May 2012 GDP release.
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