Domestic Outlook (continued)
...and international demand remains subdued
Growth in non-commodity goods exports, including manufactured goods, is forecast to slow from around 4% in the year ending December 2011 to 2% in the year ending March 2013 as the elevated exchange rate and subdued trading partner conditions slow demand growth. The forecast recovery in world demand and the easing in the exchange rate contribute to growth rising to 2.9% and 3.9% in the years ending March 2014 and 2015 respectively, slowing to 3% in the year ending March 2016.
Services export growth is forecast to be weak over much of the forecast horizon - rising world incomes and a weaker exchange rate permit some recovery in the final year of the forecasts. Exports of services are dominated by travel and transport services; conditions in this industry are expected to remain subdued, reflecting weak income growth in many developed countries and the relatively high cost of New Zealand as a tourism destination. In contrast to the weakness in these industries, exports of commercial services are trending up, and have increased almost 30% since early 2007. Growth in this latter sector is expected to continue to partly offset the weakness in tourism.
Import growth is forecast to slow to 2.8% in the year ending March 2013, from 5.2% in the year ending March 2012. The expected slowing in consumption demand reduces consumption goods import growth, and imports of services, which have risen strongly in the last two years, are expected to consolidate at a high level. The Canterbury rebuild, combined with firmer domestic demand, drives the strong rise in imports in the following two years. In the final year of the forecasts, the weaker exchange rate and more restrained demand growth result in slower import growth.
Goods export prices fall in the short-term...
Over 2011 the overseas trade index (OTI) measure of the merchandise terms of trade rose to their highest level since 1974 as solid demand and short supply of dairy and meat products lifted export prices. However, good farming conditions have led to increased dairy production around the world and prices have fallen. At the same time, trading partner demand has weakened. Further falls in export prices are expected and the System of National Accounts (SNA) measure of the merchandise terms of trade is expected to fall around 8% from its peak in September 2011 to its trough in late 2012. From the end of 2012, commodity supply growth is expected to slow and demand growth to strengthen leading to a recovery in the terms of trade over 2014 and 2015. However, recent commodity price falls point to the risk of a greater decline in the terms of trade than forecast.
- Figure 1.15 - Merchandise terms of trade (OTI basis)
- Source: Statistics New Zealand
...but recover in the medium term...
World dairy prices were around 20% below their April 2011 peak and close to their average over the past 7 years when these forecasts were finalised. Dairy prices have been supported by rapid growth in China's dairy consumption and per capita consumption remains well below that of countries such as Korea and Japan. The growth outlook for China remains solid, and is expected to generate rising demand for dairy products. Global dairy supply is expected to increase, although production costs are also expected to rise due to increased land-use competition from food, fibre and bio-fuel industries. Tighter environmental standards are also likely to contribute to higher production costs. World supply of beef and lamb is generally short following several seasons of poor farming conditions. Biological constraints on the speed of the supply response are expected to sustain prices at a relatively high level over the forecast period. Prices for forestry exports have been supported by developments in China, but the weak housing market in North America has moderated the extent of price increases. The recovery in the US is expected to gather pace over the forecast period, increasing demand for forestry products and helping to maintain forestry prices at historically high levels.
World oil prices rose over the first quarter of 2012 as the prospect of supply disruptions increased, but prices have eased in recent weeks. Oil market futures prices, which form the basis for our oil price assumption, show that oil prices in 2016 are expected to be at a similar level to current prices (US$94.4 per barrel).
...offsetting weakness in the services terms of trade
- Figure 1.16 - Goods and services terms of trade (SNA basis)
- Sources: Statistics New Zealand, the Treasury
In contrast to the expected recovery in the merchandise terms of trade, the services terms of trade are forecast to continue weakening, ending the forecast period around 20% below their current level. The price of overseas travel by New Zealanders, which is treated as imports of services in the SNA, is currently low, and is reflected in the growing number of overseas trips. On the other hand, the high exchange rate means the cost of travel to New Zealand is relatively high and the value of tourism spending has fallen in real terms. The expected decline in the New Zealand dollar increases the relative price of travel and other services imports for New Zealanders, resulting in a falling services terms of trade. Overall, the combined goods and services terms of trade deteriorate over 2012, but recover over 2013 and 2014, and stabilise at a level similar to that prevailing over 2011.
Wider current account deficit...
The current account of the balance of payments measures economic transactions between New Zealand residents and the rest of the world. It is a composite of balances on imports and exports of goods and services, income flows, and transfers. The current account deficit is expected to widen to 6.7% of GDP in the year ending March 2016, from 4.0% in the year ending December 2011, driven by a falling surplus on the trade balance and a widening of the deficit on services.
- Figure 1.17 - Current account balance
- Sources: Statistics New Zealand, the Treasury
The income deficit rose over 2011 as profit outflows recovered and was a little over 5% of GDP in the year ended December 2011. Income outflows are expected to stabilise over 2012 and to decline to 4.5% of GDP in the year ending March 2013. The goods surplus is forecast to narrow from 1.7% of GDP in the year ending December 2012 to 0.6% of GDP in the year ending March 2013. As a consequence, the current account deficit widens to 4.6% of GDP.
The goods surplus is forecast to continue to narrow and a goods deficit is expected to develop in late 2013. Small goods deficits, of around 0.4% of GDP, are expected to persist until the end of the forecast period, when the weaker exchange rate helps return the balance into surplus. The income deficit is forecast to remain around 4.5% of GDP over the years ending March 2013 to March 2015 as business profitability and interest payments keep pace with nominal GDP growth. The transfers balance is forecast to remain in deficit throughout the forecast horizon reflecting the impact of higher insurance premiums in the wake of the Canterbury earthquakes.
The current account deficit is forecast to widen to 6.7% of GDP in the year ending March 2016, but the assumption of a significant weakening in the exchange rate and the gradual unwind of activity in Canterbury mean that the deficit is narrowing. This narrowing trend is expected to continue beyond the end of the forecast period.
