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Budget 2013 Home Page Budget Economic and Fiscal Update 2013

Economic Outlook

Overview

After a slow recovery from recession, real GDP growth in the New Zealand economy picked up over 2012, reaching 2.5%, the strongest annual average rate since March 2008. Looking forward, the economy is forecast to grow at an average pace of 2.5% per year over the five years to March 2017 (Figure 1.1).

Growth outlook influenced by supportive and constraining factors

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

The growth outlook reflects the net impact of a number of supporting and constraining influences. On the supportive side are the Canterbury rebuild, a high terms of trade, low interest rates and less risk-averse households and firms.

An elevated exchange rate will act as a constraining force on growth as well as working against a rebalancing of growth towards exports. In the near term, the recent drought will also restrain growth as agricultural output is lowered, but it is expected to rebound later as weather conditions return to normal. The forecast reduction in the fiscal deficit will lean against demand growth and reduce pressure on resources, supporting lower interest rates.

These influences on the outlook for the economy are the same as in the Half Year Economic and Fiscal Update, with the exception of the drought that developed in early 2013.

Several global factors will impact in different ways...

The trading partner growth outlook is similar to that presented in the Half Year Update, strengthening slightly over the forecast period from 3.4% in 2013 to 3.9% in 2017. Around this outlook, risks have become more even as a result of policy action to reduce the prospects of downside risks eventuating, but on balance they remain skewed towards weaker growth.

Global demand is expected to push export prices higher, leading to an increase in the goods terms of trade over the forecast horizon. This is a key impetus for income growth and growth in the nominal economy, supporting tax revenues.

In contrast, global monetary policy settings are acting to hold the New Zealand dollar (NZD) at current high levels. The exchange rate is assumed to remain high until around 2015, before depreciating somewhat. This will constrain non-commodity export growth, including services exports.

The drought will reduce economic activity in the 2013 calendar year, with an estimated negative impact on real GDP growth of 0.7 percentage points. However, there are risks that the impact could be greater if the drought has a larger effect on agricultural output. The impact on nominal GDP is expected to be broadly similar to the 0.7 percentage point real impact in the 2013 calendar year, equivalent to around $1.5 billion.

...while the Canterbury rebuild is a significant driver of GDP growth...

The Canterbury rebuild is expected to provide significant impetus to growth over the forecast horizon, chiefly through additional residential and business investment, but also through related consumption spending. The rebuild will also contribute to an improvement in the labour market, with the unemployment rate falling to 5.2% by 2017. It is expected a significant proportion of the residential rebuild will be completed by 2017, but levels of investment should remain high beyond this as the commercial rebuild continues and there is a more widespread pick up in activity.

...as low interest rates and household behaviour also impact on output growth

Interest rates are expected to remain supportive of growth over most of the forecast horizon. Ninety-day interest rates are expected to begin increasing from record low levels in mid-2014 as inflationary pressures rise in the economy. Inflation is expected to rise to the middle of the 1% to 3% target band in the March 2014 year as the Canterbury rebuild ramps up and spare capacity is used up in the economy.

Households are now assumed to be broadly comfortable with their financial position, given the amount of debt reduction (as a share of income) undertaken over recent years. This, combined with some moderation in risk aversion, is expected to see the household saving rate remain broadly stable over the forecast period. This results in stronger consumption growth than in the 2012 and 2013 March years, as household spending grows more in line with income growth.

The mix of the high NZD and strong domestic demand growth contributes to a widening of the annual current account deficit, from 5.0% of GDP in the December 2012 quarter to 6.5% in the March 2017 quarter.

Table 1.1 - Economic forecasts1
(Annual average % change, March years) 2012
Actual
2013
Estimate
2014
Forecast
2015
Forecast
2016
Forecast
2017
Forecast
Private consumption 2.4 1.9 2.8 2.8 2.5 2.0
Public consumption 1.8 0.4 0.2 0.1 0.6 0.6
Total consumption 2.3 1.6 2.2 2.2 2.1 1.7
Residential investment -10.6 16.8 29.2 21.0 11.8 2.4
Market investment 8.7 7.9 14.8 6.3 1.9 0.3
Non-market investment -14.8 -14.2 -0.4 2.4 2.4 2.4
Total investment 2.3 8.0 19.7 9.6 4.1 0.9
Stock change2 0.5 -0.7 0.1 -0.2 0.0 0.0
Gross national expenditure 3.2 2.1 6.1 3.9 2.6 1.5
Exports 2.5 2.6 -2.8 2.6 2.3 2.6
Imports 6.2 -0.5 7.6 6.2 3.1 1.3
GDP (expenditure measure) 2.2 2.9 2.4 2.7 2.6 2.2
GDP (production measure) 1.9 2.5 2.4 3.0 2.6 2.2
Real GDP per capita 1.0 1.7 1.4 2.0 1.7 1.3
Nominal GDP (expenditure measure) 3.8 2.7 6.4 4.6 4.3 3.9
GDP deflator 1.6 -0.2 3.9 1.9 1.6 1.6
Output gap (% deviation, March quarter)3 -1.4 -0.8 -0.3 0.1 0.2 0.1
Employment 1.4 -0.5 1.5 2.7 1.4 1.2
Unemployment rate4 6.7 6.9 6.0 5.9 5.5 5.2
Participation rate5 68.7 67.4 68.1 68.6 68.5 68.3
Nominal wages6 3.8 2.0 2.8 2.2 2.8 3.3
CPI inflation7 1.6 0.9 1.9 2.0 2.0 2.2
Terms of trade8 1.2 -6.6 10.0 0.9 1.2 1.0
Current account balance            
  $billion -9.1 -10.1 -10.9 -12.3 -14.3 -16.6
  % of GDP -4.4 -4.8 -4.8 -5.2 -5.8 -6.5
Net international investment position            
  % of GDP -70.7 -71.9 -72.4 -74.5 -77.2 -80.9
TWI9 72.5 75.9 77.0 76.1 73.5 69.2
90-day bank bill rate9 2.7 2.7 2.7 3.6 4.3 4.8
10-year bond rate9 4.0 3.7 4.2 4.6 4.9 5.2

Notes:

  1. Forecasts finalised 18 April 2013
  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, actual for 2013
  8. System of National Accounts (SNA) and merchandise basis, annual average percentage change
  9. Average for the March quarter, actual for 2013

Longer time series for these variables are provided on page 127.

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