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Budget 2016 Home Page Budget Economic and Fiscal Update 2016

Near-term Outlook to June 2017

Domestic demand is expected to drive higher GDP growth in 2016…

Real GDP growth is forecast to accelerate to 2.8% in the calendar year 2016 from 2.5% in 2015, faster than the Half Year Update forecast of 2.3%. On a quarterly basis, GDP growth is forecast to moderate to 0.6% per quarter in the first half of 2016 from 0.9% in the second half of 2015. Annual average GDP growth is expected to rise to 2.9% by the middle of 2017 from 2.6% in June 2016, chiefly reflecting solid domestic demand.

Domestic demand is expected to be the main driver of growth in the near term, although robust demand for tourism services exports is also expected to continue. Elevated net migration inflows are expected to boost aggregate household spending, contributing to growth in private consumption and residential investment. Public consumption growth is expected to remain moderate in the near term, with the fiscal impulse exerting a mildly stimulatory effect on growth (see the Structural balance indicators box on page 38 for further details). However, weak global demand and increased supply are expected to restrain dairy prices, leading to a reduction in farm incomes and negatively affecting business investment.

...as net migration inflows lift aggregate consumption…

The annual net migration inflow is expected to peak at 70,700 in the middle of 2016, higher than its Half Year Update forecast peak of 62,700 (Figure 1.5). This, combined with a slower fall from the peak, results in approximately 50,000 more people than in the previous forecast, with most of this expected to occur over the next two years, adding impetus to demand. However, annual average per capita GDP growth is expected to remain low at 0.5% in June 2016 and increase modestly to 0.9% in June 2017.

Figure 1.5 - Net migration
Figure 1.5 - Net migration.
Source: Statistics New Zealand, the Treasury

Private consumption growth is expected to remain solid. In addition to elevated net migration inflows, other factors supporting household spending are low interest rates, solid real wage growth and the wealth effects from house price growth, all of which more than offset the impact of lower farm incomes. Low interest rates are expected to provide strong support to consumption, given that household debt is expected to remain high at around 90% of GDP in the next two years.

…and residential investment growth picks up…

House price growth in the near term is expected to remain high and to be driven increasingly by regions outside Auckland, which reflects a broadening of housing demand to the rest of New Zealand, supported by strong net migration and low interest rates. Scenario Two on page 61 in the Risks and Scenarios chapter shows how sustained strong house price growth could partly contribute to stronger-than-forecast domestic demand by boosting private consumption and residential investment.

Construction in Auckland is responding to elevated house prices, and is expected to support residential investment growth of 6.5% per year over the next two years. The pick-up in house prices across other regions is also expected to support residential investment growth. The Canterbury residential rebuild is projected to remain high in level terms over the next two years, but is not expected to contribute to growth in residential investment. The box on page 13 discusses recent developments in housing demand and construction.

…while growth in tourist arrivals boosts real services exports

Tourist spending is also expected to support demand. Real services exports are forecast to grow around 6.9% per year over the next two years. Chinese visitor arrivals are projected to rise owing to China's loosening of travel restrictions and continuing income growth across emerging Asian economies. Visitor arrivals from New Zealand's traditional source markets of Australia, the US and Europe are also expected to increase as New Zealand is perceived as a relatively safe place to visit. In addition to the boost to services exports, tourism is expected to support construction activity over the next couple of years through increased pressure on infrastructure and accommodation capacity.

However, weak global demand continues to weigh on commodity prices...

While the outlook for domestic demand is positive, TPG is expected to ease slightly in 2016. The Chinese economy is expected to continue to transition from investment-led growth towards a more consumption-based model, leading to slower growth. The slowdown in China's investment growth, which is commodity-intensive, is expected to weigh on growth in commodity-exporting economies including Australia, but growth in Australia is expected to be supported by a gradual rebalancing in investment from mining to other sectors, facilitated in turn by low interest rates.

The recovery in the US and UK is expected to continue, but at a slower pace than in the past year, owing to weak demand for their exports and slower private consumption growth. Growth in the euro area and Japan is expected to remain low, owing to weak investment growth and low Chinese demand. All told, TPG is expected to ease slightly from 3.5% in 2015 to 3.4% in 2016, before increasing gradually from 2017 (Table 1.2).

Table 1.2 -Trading partner growth (annual % change)
Calendar years 2016
weights
2015
Actual
2016
Forecast
2017
Forecast
2018
Forecast
2019
Forecast
2020
Forecast
China 24% 6.9 6.5 6.3 6.2 6.1 6.0
Australia 22% 2.5 2.5 2.8 2.8 2.8 2.8
United States 13% 2.4 2.1 2.2 2.4 2.4 2.4
Newly Industrialised Economies* 11% 2.0 2.2 2.5 2.9 3.0 3.1
ASEAN-4^ 8% 4.6 4.5 4.7 4.9 4.9 4.9
Euro area 7% 1.5 1.4 1.5 1.5 1.5 1.5
Japan 7% 0.5 0.5 0.6 0.9 1.0 1.0
United Kingdom 4% 2.3 2.0 2.0 2.0 2.0 2.0
Canada 2% 1.2 1.5 2.0 2.1 2.2 2.2
India 2% 7.3 7.5 7.5 7.0 7.0 7.0
Trading partner growth (TPG) 100% 3.5 3.4 3.5 3.7 3.8 3.8
TPG - Consensus (April 2016)   3.5 3.4 3.6 3.6 3.6 3.7
TPG - IMF WEO (April 2016)   3.5 3.4 3.6 3.7 3.7 3.7
TPG - The Treasury (2015 Half Year Update)   3.5 3.6 3.8 3.9 3.9 3.8

*South Korea, Singapore, Taiwan, Hong Kong

^ Malaysia, Indonesia, Thailand, Philippines

Sources: IMF, Consensus Forecasts, the Treasury

…reduces global inflation…

Slower growth in the world economy reinforces a weaker outlook for global inflation. Consequently, monetary policy settings across most economies are expected to remain highly stimulatory. Central banks in the euro area and Japan are expected to continue with large-scale asset purchases for some time, while the US Federal Reserve signalled that policy rate rises over 2016 may occur slower than previously indicated. Nevertheless, further tightening in US monetary policy is expected as US domestic conditions improve, putting upward pressure on global interest rates over the forecast period.

Risks to global growth and inflation remain skewed to the downside. The risks with the largest potential impact on the New Zealand economy include a sharp slowing in China's growth, which would impact on other trading partners, and a further moderation of growth in advanced economies leading to a more prolonged period of low inflation. Other risks, including the possibility of Britain exiting the European Union, may lead to high volatility in global markets. The realisation of any of these risks would weigh on demand and inflation in New Zealand. Scenario One on page 59 in the Risks and Scenarios chapter shows how weaker-than-forecast TPG could impact on the New Zealand economy.

...and restrains the terms of trade…

Subdued global demand and excess supply are expected to continue to weigh on world prices for many of New Zealand's key commodity exports, including dairy, lamb and forestry. The goods terms of trade are expected to remain around their current levels, following large falls over the past two years (Figure 1.6). Lower import prices, partly reflecting a fall in oil prices, provide some positive offset. Dairy prices are expected to remain around their current levels over the first half of 2016 before recovering as excess global supply is absorbed by the market.

Figure 1.6 - Goods terms of trade (SNA basis)
Figure 1.6 - Goods terms of trade (SNA basis).
Source: Statistics New Zealand, the Treasury

The annual current account deficit is expected to widen. The goods deficit is expected to rise as falls in export prices and reduced dairy production continue to flow through to lower export receipts. While the services surplus is expected to remain high, its pace of increase is expected to moderate. The annual current account deficit is expected to rise to 4.6% in the June quarter 2017 owing to a wider goods deficit, but this represents a lower peak than in the Half Year Update, reflecting a sustained high level of tourist spending.

...which presents a drag on business investment growth in the first half of 2016

Low export prices have reduced farm incomes, which negatively impacts on investment in the agricultural sector. In addition, previous New Zealand dollar depreciation has flowed through to price rises for imported capital goods, weighing on business investment. Annual average growth in market investment is forecast to be soft at 2.2% in June 2016, driven by a contraction in market investment in the December quarter 2015. According to the Quarterly Survey of Business Opinion, investment intentions for the first half of 2016 remained soft, firms' own activity expectations declined and business confidence fell, reinforcing a relatively slow recovery in business investment in the first half of 2016.

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