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Budget 2013 Home Page Budget Economic and Fiscal Update 2013

New Zealand Economic Outlook

Moderate growth in New Zealand's economy expected to continue...

Overall, real GDP growth in the New Zealand economy is expected to be similar to the forecasts presented in the Half Year Update in December, averaging 2.5% per year, a little above the Treasury's estimate of potential growth over the forecast period. However, the profile of growth is slightly different to the Half Year Update, owing to a stronger-than-expected exchange rate, lower-than-expected pricing pressures, revisions to previous data and, most notably, the impact of the drought on the agricultural and related industries.

Real production GDP growth is forecast to be 2.5% and 2.4% in the years ending March 2013 and March 2014 respectively, compared with 2.3% and 2.9% forecast in the Half Year Update. The March 2014 year growth rate is lower than in the Half Year Update primarily because of the impact of the drought on the economy.

Nevertheless, growth in the March 2015 year and beyond is expected to pick up as business and residential investment rise, in part driven by the Canterbury rebuild, as well as the recovery from the drought. Growing consumption, as incomes improve, also plays a part. Net exports are expected to be a drag on growth from 2013 to 2016 (March years), as a higher NZD impacts on export and import demand. Imports also grow owing to demand arising from the Canterbury rebuild. After this, net exports are forecast to provide a positive contribution as international demand continues to grow and the NZD depreciates. Figure 1.4 shows the main contributions to expenditure GDP growth.

Figure 1.4 - Composition of Expenditure GDP growth
Figure 1.4 - Composition of Expenditure GDP growth.
Sources: Statistics New Zealand, the Treasury private consumption continues growing solidly...

Private consumption is expected to make a solid contribution to GDP growth over the forecast period. Private consumption growth is expected to pick up over 2013 and 2014 as consumer confidence remains elevated and incomes rise. Annual real private consumption growth is forecast to peak at 2.8% in the 2014 and 2015 March years, before moderating to 2.0% in the March 2017 year (Figure 1.5). The other main driver of the increase in consumption over the forecast period is the pick up in residential investment, especially with the Canterbury rebuild, resulting in additional durables consumption. It is expected that the recent rise in house prices will have less effect on consumption than in the previous cycle, as households have become more cautious. As a result, consumption generally grows with income, with only a small scope for housing equity withdrawal as a means of funding additional spending. The Government's signalled changes to ACC levies are expected to result in additional modest increases in consumption, focused mainly towards the end of the forecast period. More details on signalled changes to ACC levies can be found in the Fiscal Outlook chapter on page 35.

Figure 1.5 - Private consumption
Figure 1.5 - Private consumption.
Sources: Statistics New Zealand, the Treasury

...while the household saving rate remains steady

Household saving as a percentage of disposable income is expected to remain broadly in balance across the forecast period, as it has been for the past few years (Figure 1.6). This represents a shift in behaviour from much of the past two decades and its continuation will be an important factor influencing demand in the economy. Household saving is around 10 percentage points higher than its low a decade ago.

Figure 1.6 - Net household saving rate
Figure 1.6 - Net household saving rate.
Sources: Statistics New Zealand, the Treasury

It is assumed that households are now broadly comfortable with the amount of debt reduction (as a share of income) undertaken over recent years given developments in their net worth, partly driven by house price developments, reduced uncertainty about future economic growth, and income prospects. However, households are expected to remain cautious in their spending habits, with increases in consumption coming from rises in income, rather than from running down assets or increasing debt further.

GDP growth to be boosted by residential investment from the Canterbury rebuild...

Residential investment remains a key driver of demand growth in these forecasts. A significant proportion of the growth in residential investment across the forecast period is driven by earthquake-related investment associated with the Canterbury rebuild. There are signs that the rebuild is about to ramp up significantly, with building consents and anecdotal evidence from the region suggesting that a number of the factors delaying progress thus far are diminishing. Annual real residential investment growth is expected to peak at almost 30% in the March 2014 year, as the Canterbury rebuild gets into full swing.

While the Canterbury rebuild is expected to make up a large proportion of the surge in residential investment over the forecast period, activity in the rest of the country is also expected to rise significantly, especially in the Auckland region. Figure 1.7 shows the level of real residential investment with and without the Canterbury rebuild. The drivers of the underlying growth include a catch up for past population growth, expected future population increases (including through migration), rising household incomes, low interest rates and some ongoing repairs of leaky homes.

Figure 1.7 - Real residential investment
Figure 1.7 - Real residential investment.
Sources: Statistics New Zealand, the Treasury

Higher house prices, particularly in the Auckland region, are expected to encourage an increase in new home building, with signs of this already in dwelling consents data. This will help to moderate growth in house prices, but will take some time, with annual house price inflation forecast at around 7% in each of the March 2013 and 2014 quarters. The growth in residential investment begins to moderate after the March 2014 year, when the pace of the Canterbury rebuild reaches its peak. well as strengthening market investment...

A pick up in market investment is also expected to be a strong driver of growth over the forecast period. While market investment has recovered somewhat following the global financial crisis, it is yet to exceed its pre-crisis peak (Figure 1.8). However, improved business confidence, low interest rates, a high exchange rate (making imported capital goods cheaper) and some catch up are all expected to result in stronger growth over 2013 and 2014. Later in the forecast period, higher interest rates and a lower exchange rate will see market investment growth moderate. The Canterbury rebuild is also expected to contribute to the increase in market investment.

Figure 1.8 - Real market investment
Figure 1.8 - Real market investment.
Sources: Statistics New Zealand, the Treasury
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