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Budget 2014 Home Page Budget Economic and Fiscal Update 2014

Economic Outlook (continued)

Higher terms of trade and increased net migration inflows provide a temporary boost... 

The terms of trade (the price of exports relative to imports) have risen to 40-year highs, leading to an increase in national income and purchasing power. These gains are reflected in increased consumer spending and business investment. Higher net migration inflows are also adding to demand. As a consequence, the near-term growth outlook is slightly stronger than forecast in the Half Year Update (Figure 1.1). However, recent gains in the terms of trade and net migration are expected to be temporary.

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

Rising dairy export prices have been a major contributor to the higher terms of trade but, more recently, dairy prices have moved lower and further falls are anticipated as global supply increases. Demand from Asia, and China in particular, is expected to remain strong and to provide support for historically high prices over the medium term. Prices for many other export commodities are also at high levels but, like the market for dairy products, increases in supply are expected to result in lower prices over the next 12 to 18 months.

Overall, the terms of trade are projected to decline by about 9% over the next year but to remain at a high level over the medium term. This is a small decline relative to many of those experienced over the past 40 years and the historical experience suggests that the terms of trade will, in all likelihood, be much more volatile than projected. Nonetheless, over the medium term the terms of trade are expected to settle at a level that is well above their long-run trend (see Box on the outlook for the terms of trade on page 13). The Risks and Scenarios chapter explores the likely effects of a large and sustained fall in the terms of trade.

Table 1.1 - Economic forecasts1
(Annual average % change,
March years)
2013
Actual
2014
Forecast
2015
Forecast
2016
Forecast
2017
Forecast
2018
Forecast
Private consumption 2.6 3.6 4.1 3.6 2.4 1.6
Public consumption -0.6 1.4 0.0 1.2 1.9 1.6
Total consumption 1.9 3.1 3.3 3.1 2.3 1.6
Residential investment 19.4 14.5 22.6 10.8 1.6 0.1
Market investment 4.9 11.3 9.6 4.3 3.8 2.8
Non-market investment -9.9 1.6 2.7 2.4 2.4 2.4
Total investment 7.3 11.8 13.6 5.7 3.5 2.4
Stock change2 -0.4 0.2 0.2 -0.1 -0.2 -0.1
Gross national expenditure 2.3 5.2 6.3 3.7 2.5 1.7
Exports 2.6 -0.7 1.4 2.1 2.7 2.6
Imports 1.2 8.2 6.6 4.4 3.7 1.6
GDP (expenditure measure) 2.6 2.5 3.9 3.0 2.1 2.1
GDP (production measure) 2.3 3.0 4.0 3.0 2.1 2.1
Real GDP per capita 1.6 2.0 2.2 1.7 1.1 1.2
Nominal GDP (expenditure measure) 2.2 6.7 5.7 4.3 4.5 3.7
GDP deflator -0.5 4.1 1.7 1.3 2.3 1.6
Output gap (% deviation, March year avg)3 -1.2 -0.4 0.8 1.2 0.6 0.2
Employment 0.3 2.4 3.0 1.8 1.3 1.2
Unemployment rate4 6.2 5.9 5.4 5.1 4.8 4.4
Participation rate5 67.9 69.0 69.3 69.2 69.1 69.0
Nominal wages6 2.1 3.0 2.7 3.1 3.5 3.5
CPI inflation7 0.9 1.5 1.8 2.5 2.3 2.0
Terms of trade8 -5.9 13.2 1.6 -4.9 0.9 0.2
House prices9 7.6 8.0 7.3 4.3 2.5 2.4
Current account balance            
    $billion -8.3 -7.0 -10.4 -14.6 -16.0 -17.1
    % of GDP -3.9 -3.1 -4.4 -5.9 -6.2 -6.3
Net international investment position            
   % of GDP -71.4 -65.9 -66.7 -69.8 -73.0 -76.6
TWI10 75.9 78.7 78.6 78.4 76.9 73.2
90-day bank bill rate10 2.7 3.0 4.3 4.8 4.9 5.3
10-year bond rate10 3.7 4.6 4.8 5.0 5.1 5.2

Notes:

  1. Forecasts finalised 17 April 2014.
  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.
  8. System of National Accounts (SNA) and merchandise basis, annual average percentage change.
  9. QVNZ House Price Index, annual percentage change.
  10. Average for the March quarter. CPI, TWI and interest rates are actuals for 2014.

Longer time series for these variables are provided on page 132.

Net permanent and long-term migration inflows have continued to rise in recent months, increasing the population and adding to demand in the housing market and to private consumption demand more broadly (Figure 1.2). Net inflows reached nearly 32,000 in the 12 months to March 2014, almost double the inflow at the time of the Half Year Update, and have contributed to a doubling in annual population growth over the past 18 months.

Figure 1.2 - Private consumption and net migration
Figure 1.2 - Private consumption and net
migration.
Source:  Statistics New Zealand, the Treasury

Much of the rise in net migration inflows is accounted for by fewer departures, mostly to Australia, reflecting the relatively positive outlook for employment growth in New Zealand. Arrivals from Australia have also strengthened, driven by returning New Zealanders. Annual net migration is expected to increase further, to around 38,000 later this year, before declining gradually to its long-run average inflow of 12,000 per year. However, like the terms of trade, movements in net migration are hard to predict and can change rapidly. The implications of a greater increase in net inflows are discussed in the Risks and Scenarios chapter.

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