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Budget 2012 Home Page Budget Economic and Fiscal Update 2012

Domestic Outlook

New Zealand's economic recovery continues...

Economic activity over 2011 was disrupted by the Canterbury earthquake of 22 February and subsequent aftershocks. The immediate disruption to overall economic activity proved to be less than the Treasury initially forecast, although the negative effects on tourism and on construction activity have been more pronounced. In the second half of 2011, the economy was buoyed by the effect of the RWC on consumption and a strong start to the dairy season. Offsetting these positive influences, the international environment deteriorated and domestic business confidence weakened. As a consequence, forecast real GDP growth for the year ending March 2012 has been downgraded from 1.9% in the BPSto 1.6%.

Figure 1.6 - Composition of GDP growth
Figure 1.6 - Composition of GDP growth.
Sources: Statistics New Zealand, the Treasury

The weaker international outlook, combined with a stronger New Zealand dollar assumption, has also reduced forecast real GDP growth in the years ending March 2013 and March 2014 to 2.6% and 3.4% respectively. Growth across the remaining two years of the forecast period averages 3% per year.

GDP growth is led by investment, underpinned by the Canterbury rebuild. This is partly offset by the negative impact from the import content of investment. Consumption spending also makes a significant contribution to forecast growth as private consumption spending rises and more than offsets slower growth in public consumption. Export volume growth is expected to be subdued as farming conditions return to normal, international prices weaken and the high New Zealand dollar constrains returns, although the latter factors become more favourable towards the end of the forecast period.

Figure 1.7 - Real private consumption growth
Figure 1.7 - Real private consumption growth.
Sources: Statistics New Zealand, the Treasury

...consumers remain cautious...

Private consumption growth, which has moderated since the 2008/09 recession, received a boost from the RWC. While some of the rise in consumer spending, such as that on hospitality and supermarket sales, appears to be closely linked to the RWC, spending on consumer durables, such as televisions and furniture, is indicative of a more generalised improvement in consumer sentiment.

Over the past year the labour market has strengthened, although unemployment remains elevated, household incomes have risen and consumer confidence has returned to average levels. Nonetheless, consumers continue to be cautious in their spending following an extended period when household consumption exceeded income, leading to an accumulation of debt. The excess of household consumption over income closed around the time the 2008/09 recession started and gross household income is now significantly greater than consumption.

Household consumption growth is expected to slow from 2.7% over the year ending March 2012, to 2.2% in the year ending March 2013 as the one-off impact of the RWC fades. The pace of growth rises to 2.9% in the year ending March 2014, supported by increasingly favourable economic conditions and by demand for durable goods, such as furniture and furnishings, associated with newly constructed dwellings. A gradual easing, to 2.8% and 2.6%, is forecast in the following years.

...and household saving increases

Figure 1.8 - Household saving and leverage
Figure 1.8 - Household saving and leverage.
Sources: Statistics New Zealand, Reserve Bank of New Zealand, the Treasury

Household income growth is also forecast to slow over the year to March 2013, reflecting the lower terms of trade, and the household saving ratio remains around its current rate. From March 2013 onwards, the faster pace of GDP growth feeds through to a stronger labour market and the terms of trade improve, increasing household incomes. The household debt to income ratio has declined from its peak but remains elevated. Continued restraint in consumption spending is expected to generate higher saving and further falls in the debt-to-income ratio.

Ongoing household caution is reflected in the subdued outlook for house price inflation. The forecast for rapid growth in the supply of houses also helps to temper gains in house prices. House price growth of around 1.5% per year is forecast, less than the rate of consumer price inflation.

Residential investment rises rapidly...

Households have also been cautious in their residential investment decisions, which have contributed to weakness in the residential construction industry. This generalised weakness has been compounded by the earthquake disasters in Canterbury. Indicators of residential building activity show activity is likely to remain at a low level in the short term. Household credit growth is weak and building consents are rising but the level remains low.

Figure 1.9 - Real residential investment
Figure 1.9 - Real residential investment.
Sources: Statistics New Zealand, the Treasury

In Canterbury there is a significant amount of repair work underway, but the number of new dwelling consents and rebuilds is small. Repair and rebuilding work is expected to accelerate over coming months and to continue rising for most of the forecast period. Much uncertainty surrounds the expected pace of new building work, although potential cost inflation is also a significant uncertainty. The Treasury forecasts assume a large increase in residential investment from the middle of 2012. The pace of activity is forecast to continue to rise, reaching a peak growth rate of over 40% in the year ending March 2014. The level of activity continues to rise for the remainder of the forecast period, but the growth rates slow to 15% in the year ending March 2015 and 5.2% in the year ending March 2016.

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