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Budget 2016 Home Page Budget Economic and Fiscal Update 2016

Economic Outlook

Overview

  • Growth in the New Zealand economy picked up in the second half of 2015 and was higher than anticipated in the Half Year Update on the back of strong net migration inflows, residential construction and elevated tourist spending. On the other hand, trading partner growth eased in 2015 in line with the Half Year Update and the outlook is weaker than previously forecast. China's growth slowed as the economy transitions from investment to more consumption as the key driver of growth, weighing on growth in other Asian trading partners and Australia.
  • Annual average GDP growth in New Zealand is expected to accelerate from 2.6% in June 2016 to 2.9% in June 2017, as net migration inflows, low interest rates and tourist spending drive growth in consumption, residential investment and services exports. However, previous falls in commodity prices are expected to reduce goods exports.
  • GDP growth is forecast to increase to 3.2% in the 2018 June year. A pick-up in growth in New Zealand's key trading partners and slower growth in global dairy supply are expected to lead to a lift in commodity export prices. The consequent recovery in farm incomes is expected to support business investment and a rebound in exports growth, and previous strong population growth boosts construction.
  • Some spare capacity in the economy is expected to remain in the near term as higher labour supply lifts the economy's productive capacity, resulting in low non-tradables inflation, which is reinforced by weak inflation expectations. However, labour supply growth is expected to slow from 2017 and productivity growth is expected to remain subdued, leading to a reduction in spare capacity and a rise in inflationary pressure.
  • Nominal GDP growth is expected to remain low in the near term as a result of the relatively subdued terms of trade and low inflation, although it is held up by solid real GDP growth. Nominal GDP growth is expected to increase in later years, as the terms of trade and inflation recover and real GDP growth remains solid.
  • There are key risks to the New Zealand economy. Global risks remain skewed to the downside, including a sharp slowdown in China's growth, persistently low global inflation, a possible British exit from the European Union and geopolitical risks. Domestic risks are more balanced, relating to inflation dynamics, the current migration cycle and house price growth. These risks are discussed in the Risks and Scenarios chapter.
Table 1.1 - Economic forecasts (June years)1
Note: In this Update, economic forecasts are presented on a June year basis
(rather than March years as in previous Updates) for consistency with the fiscal forecasts.
(Annual average % change,
June years)
2015
Actual
2016
Forecast
2017
Forecast
2018
Forecast
2019
Forecast
2020
Forecast
Private consumption 2.7 3.0 3.3 2.6 2.5 2.3
Public consumption 2.1 2.1 2.0 1.4 1.0 1.1
Total consumption 2.6 2.8 3.0 2.3 2.2 2.0
Residential investment 8.5 5.4 6.5 7.4 5.5 -0.8
Market investment 5.2 2.2 6.1 6.1 7.7 5.0
Non-market investment 27.0 3.0 8.4 -1.9 -8.3 0.5
Total investment 7.8 3.1 5.8 5.4 5.6 2.8
Stock change2 -0.3 -0.2 -0.1 0.3 0.3 0.4
Gross national expenditure 3.4 2.7 3.7 3.3 3.3 2.5
Exports 5.7 3.7 0.4 4.5 2.7 2.3
Imports 6.6 0.5 3.8 4.6 4.3 2.4
GDP (expenditure measure) 3.3 3.5 2.6 3.3 2.8 2.5
GDP (production measure) 3.3 2.6 2.9 3.2 2.8 2.5
Real GDP per capita 1.5 0.5 0.9 1.9 1.9 1.6
Nominal GDP (expenditure measure) 2.8 3.5 3.6 5.6 5.1 4.1
GDP deflator -0.5 0.0 1.0 2.2 2.2 1.5
Potential GDP 3.0 3.0 2.9 2.6 2.6 2.4
Output gap (% deviation, June quarter)3 -1.0 -1.0 -0.6 -0.2 0.0 0.0
Employment 3.2 1.4 2.2 1.9 2.0 1.5
Unemployment rate4 5.9 5.6 5.6 5.1 4.6 4.6
Participation rate5 69.3 68.5 68.4 68.6 68.9 68.9
Nominal wages6 2.8 1.7 1.4 1.9 2.3 2.9
CPI inflation7 0.4 0.1 1.5 2.0 1.9 2.1
Terms of trade8 -5.0 -4.7 0.4 3.7 2.3 -0.6
House prices9 11.1 8.9 7.7 2.3 2.0 2.0
Current account balance            
  $billions -8.4 -8.7 -12.0 -11.2 -12.2 -14.4
  % of GDP -3.5 -3.5 -4.6 -4.1 -4.3 -4.8
Household saving ratio (% of HHDI)10 -0.7 0.6 0.8 0.4 0.3 0.1
TWI11 76.2 72.5 70.5 70.2 70.3 69.5
90-day bank bill rate11 3.5 2.2 2.2 2.6 3.7 4.2
10-year bond rate11 3.6 3.1 3.2 3.9 4.2 4.4

Data in the table are in June years unless otherwise specified, and March year tables are provided on page 138.

Longer time series for these variables are provided on page 137.

Notes:

  1. Forecasts finalised 13 April 2016.
  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, June quarter, seasonally adjusted.
  5. Percent of the working-age population, June 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 goods basis.
  9. Quotable Value New Zealand (QVNZ) House Price Index, annual percentage change.
  10. % of household disposable income (HHDI), March years.
  11. Average for the June quarter.

Key economic forecast assumptions

  • Trading partner growth is assumed to ease marginally in 2016, as growth is expected to slow in China, most emerging Asian economies, the US and euro area. It then increases gradually over the remainder of the forecast period.
  • Dairy prices are assumed to recover at a modest rate, returning towards the long-term levels forecast by the OECD-FAO of US$3,400/metric tonne (mt) by the middle of 2018 from $2203/mt in early May 2016.
  • West Texas Intermediate (WTI) oil prices are assumed to rise from US$33 per barrel in the March 2016 quarter to US$63 in the June 2020 quarter.
  • Net permanent and long-term migration inflows are assumed to rise from 68,000 in the year ended March 2016 to a peak of 70,700 in the year ended June 2016 and to return to the long-run assumption of 12,000 per year in the year ended June 2019.
  • Annual growth in the working-age population is assumed to average 1.5% per June year over the forecast period.
  • Economy-wide multifactor productivity growth is assumed to average 0.5% per year between the years ending June 2016 and June 2020.
  • Economy-wide labour productivity growth is assumed to average 1.0% per year between the years ending June 2016 and June 2020.
  • Annual average growth in potential output is assumed to fall from 3.0% in June 2016 to 2.4% in June 2020 as population growth slows.
  • Non-tradables inflation is assumed to respond to capacity pressures as previously thought.
  • Non-tradables inflation is also assumed to respond to inflation expectations. However, inflation expectations are assumed to be more influenced by recent low inflation than previously considered, leading to a later return of inflation to 2%.
  • The assumed neutral level of the 90-day interest rate is 4.5%.
  • The non-accelerating inflation rate of unemployment (NAIRU) is assumed to be around 4.5% by the end of the forecast period.

Policy impact assumptions

  • Increases in the tobacco excise tax in the March quarter each year are estimated to contribute 0.2 percentage points to annual CPI inflation for each of the next four years.
  • The reduction in Accident Compensation Corporation (ACC) vehicle levies in the September 2016 quarter is estimated to reduce annual CPI inflation by 0.2 percentage points.
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