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Budget 2015 Home Page Budget Economic and Fiscal Update 2015

Medium-term Outlook

Growth moderates gradually in the medium term…

Growth in output from 2016 onwards is a little stronger than in the Half Year Update. Annual average growth for the year to March 2016 is expected to be 3.1%, and is then forecast to ease gradually to 2.4% at the end of the forecast period. Consumption and investment growth moderate as population and labour income growth ease, construction activity slows and interest rates rise. Relative to the Half Year Update, growth is forecast to be slightly slower in the first part of the forecast period reflecting the downward revisions to historical growth by Statistics New Zealand. Growth is higher later in the forecast period chiefly reflecting faster private consumption growth, largely as a consequence of lower import prices and interest rates.

Higher population growth compared to the Half Year Update contributes to a small upward revision to the economy's potential growth rate over the forecast period.[5] The annual average rate is estimated to increase from around 2.5% currently to 2.8% in mid-2017 as productivity growth rises from low levels with labour productivity growth rising towards trend. Potential growth averages around 2.6% over the forecast period (Figure 1.9).

Figure 1.9 - Actual and potential GDP growth
Figure 1.9 - Actual and potential GDP growth.
Sources: Statistics New Zealand, the Treasury

…as population growth eases…

The annual net inflow of migrants is expected to ease from a peak of 56,600 in June 2015 as departures increase and arrivals decline from record high levels in line with an improving Australian economy. Net inflows return to the long-run assumption of 12,000 a year by mid-2017. The change in the profile of migration results in an additional 11,400 people over the forecast period compared to the Half Year Update.

Risks remain around the duration and size of migration flows. Scenario two in the Risks and Scenarios chapter assesses the potential impact of stronger domestic demand, in part driven by a larger than expected migration cycle.

…and employment and income growth slows

Annual employment growth is forecast to moderate from its 3.5% pace in the December 2015 quarter (Figure 1.10). The unemployment rate declines gradually to 4.5% in late 2017 as the contribution to the labour force from migration eases and labour force participation stabilises at slightly lower levels.

Figure 1.10 - Employment, labour force and unemployment rate
Figure 1.10 - Employment, labour force and unemployment rate.
Sources: Statistics New Zealand, the Treasury

As the labour market tightens and inflation begins to rise, average hourly wage growth picks up gradually to 3.3% in the March quarter of 2019 from 2.5% in March 2016. Beyond June 2016, total labour income growth is slightly softer than previously forecast, mainly reflecting slower wage growth.

Household expenditure growth eases…

Private consumption is forecast to grow by 3.9% in the March 2016 year (contributing 2.3 percentage points to GDP growth [Figure 1.11]), before easing to 2.8% as support from population and labour income growth moderates and interest rates increase. Growth is stronger in later years compared to the Half Year Update given lower consumption import prices and lower interest rates.

Figure 1.11 - Contributions to real GDP growth
Figure 1.11 - Contributions to real GDP growth.
Sources: Statistics New Zealand, the Treasury

…while residential investment peaks…

Residential investment is expected to rise further, albeit at a slower rate than over recent years with activity peaking in early 2018. Investment is driven by strong population growth and housing demand in the Auckland market. A high level of activity in Canterbury is expected to be sustained for some time providing a solid base, although recent data have shown a decline in residential consents in the Canterbury region, posing some downside risk.

…and business investment slows as interest rates rise

Firms are forecast to expand their investment as output grows, supported by low interest rates and a high NZ dollar. Annual average growth in business investment is expected to remain over 5.0% until the March 2017 year, before easing to 2.4% in the March 2019 year as interest rates begin to rise and Canterbury rebuild-related growth slows.

Government expenditure growth remains subdued

Fiscal policy is forecast to exert a mild constraining influence on demand over most of the forecast period with operating allowances unchanged from the Half Year Update. Government consumption growth is expected to ease over the next few years before picking up in the 2017 fiscal year reflecting a larger operating allowance. Operating allowances are added to government expenditure as a technical assumption in the forecasts, but in practice are available for a combination of expenditure and revenue initiatives.

Trading partner growth is uneven…

Trading partner growth is expected to increase in 2015 and 2016 as growth remains on track in the US and picks up from a slow pace in the euro area and Japan (Table 1.2). Australian growth is expected to remain below trend for longer as the rebalancing from mining investment to other sectors of the economy progresses slowly. In addition, China's growth is slowing as investment growth eases. A greater weighting to higher growth economies means trading partner growth is slightly stronger than previously forecast in the longer term.

Table 1.2 - Trading partner growth forecasts (annual % change)
China 25% 7.4 7.0 6.9 6.8 6.6 6.5
Australia 24% 2.7 2.5 2.8 3.0 3.0 3.0
Other Asia* 22% 4.1 4.3 4.4 4.5 4.5 4.5
United States 11% 2.4 3.0 2.8 2.7 2.6 2.5
Euro area 7% 0.9 1.2 1.4 1.4 1.4 1.4
Japan 7% -0.1 0.9 1.4 0.6 0.7 1.0
United Kingdom 4% 2.6 2.6 2.3 2.0 2.0 2.0
Canada 1% 2.5 2.4 2.2 2.3 2.2 2.2
Trading Partner Growth (TPG) 100% 3.7 3.8 3.9 4.0 4.0 4.0
TPG - Consensus (April 2015)   3.7 3.9 4.1 4.0 3.9 3.9
TPG - IMF WEO (April 2015)   3.7 3.9 3.9 3.8 3.8 3.9
TPG - The Treasury (2014 Half Year Update)   3.7 3.9 3.9 3.9 3.9 3.9

* South Korea, Taiwan, Hong Kong, Singapore, Malaysia, Indonesia, Thailand, Philippines, India

Sources: IMF, Consensus Forecasts, Haver Analytics, the Treasury


  • [5]Potential growth is the rate at which the economy can expand while maintaining stable inflation. It depends on how many people are available to work and how many hours they are willing to work (labour); the number of buildings, machines and computers (capital); and the efficiency with which they are used (total factor productivity).
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