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Budget 2014 Home Page Budget Economic and Fiscal Update 2014

Risks and Scenarios

Overview

  • This chapter outlines the general economic and fiscal risks associated with the main forecast. Domestic risks to the economic outlook are fairly evenly balanced, while global risks remain skewed to the downside.
  • Domestically, the risks with potentially the largest impact on the New Zealand economy relate to the pace of the Canterbury rebuild and its interaction with the wider economy, the sensitivity of households to higher debt servicing costs, along with net migration’s impact on domestic demand.
  • Stimulatory monetary policy settings appear to be succeeding in increasing demand in advanced economies, although inflation has been benign, particularly in the euro area. The risks posed to the recovery in emerging markets have increased since the Half Year Update with markets reassessing economic and financial fundamentals in some economies.
  • Two scenarios are presented which represent two ways in which the New Zealand economy could deviate from the main forecast. Scenario one is based on a larger decline in the terms of trade than in the main forecast. Scenario two is based on a more robust domestic demand cycle driven by a stronger migration cycle. If these scenarios or any other significant deviations from the main forecast did eventuate, this would impact on the Government's fiscal performance and position.
  • In addition to risks associated with the economy, the Crown is also subject to expenditure and balance sheet risks. In particular, volatility in market prices such as interest rates can have a significant impact on the Crown's fiscal position.
  • The first part of this chapter outlines the key risks to the economic outlook. The second part of the chapter presents two alternative scenarios for the economy. The remainder of the chapter focuses on general fiscal risks that can impact the Crown’s fiscal position.
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