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Budget 2017 Home Page Budget Economic and Fiscal Update 2017

Economic Outlook

Overview

  • Over 2016 the New Zealand economy grew 3.1% in real terms and 5.5% in nominal terms, underpinned by investment, private consumption (supported by strong migration inflows) and low interest rates. Gross Domestic Product (GDP) per capita grew 0.9% and the current account deficit narrowed to 2.7% of GDP.
  • Relative to the Half Year Update, growth was moderately weaker than expected as exports, residential investment and business investment grew at a slower pace than anticipated. Price developments worked in the opposite direction. Nominal GDP growth was stronger than forecast in the Half Year Update, supported by the higher-than-expected terms of trade.
  • Real GDP growth in the New Zealand economy is forecast to pick up slightly in 2017, supported by migration inflows, investment and a recovery in exports. Growth is then forecast to accelerate to a peak of 3.8% in 2019 as investment growth gains momentum and private consumption is supported by fiscal stimulus associated with the Family Incomes Package (see the Economic and fiscal impacts of the Family Incomes Package box on page 22).
  • Growth in the labour supply slows later in the forecast period as net migration inflows subside. Slower population growth, easing construction growth and rising interest rates contribute to a moderation in real GDP growth to 2.4% by 2021 with inflation near 2%.
  • Trading partner growth was steady in the second half of 2016, in part because faster growth in the US was offset by slower growth in Australia. The outlook for trading partner growth is broadly similar to the Half Year Update, although downside risks to inflation have decreased.
  • Nominal GDP growth averages 5.1% per year over the forecast, with the level of nominal GDP a cumulative $23.9 billion higher than in the Half Year Update in the five years to June 2021, in part reflecting a higher starting point.
  • The outlook is subject to a range of risks and uncertainties. As outlined in the Risks and Scenarios chapter, global risks are skewed to the downside while domestic risks are more balanced.
Table 1.1 - Economic forecasts (June years)
(Annual average % change, June years) 2016
Actual
2017
Forecast
2018
Forecast
2019
Forecast
2020
Forecast
2021
Forecast
Private consumption 3.2 4.6 3.9 3.7 2.2 1.8
Public consumption 1.9 3.0 2.0 1.4 1.4 1.1
Total consumption 2.9 4.2 3.5 3.2 2.0 1.7
Residential investment 6.3 6.7 0.3 8.7 8.8 3.3
Business investment1 2.7 6.4 6.8 5.9 5.7 4.5
Total investment 3.6 6.5 5.1 6.6 6.5 4.2
Stock change2 -0.4 0.4 -0.4 0.1 0.2 0.1
Gross national expenditure 2.7 5.5 3.7 4.1 3.3 2.4
Exports 5.1 -0.6 3.4 3.3 2.7 2.9
Imports 1.3 6.3 3.7 4.5 4.2 2.9
GDP (expenditure measure) 3.7 3.5 3.4 3.8 2.8 2.4
GDP (production measure) 2.7 3.1 3.5 3.8 2.9 2.4
Real GDP per capita 0.7 0.9 1.4 1.8 1.3 1.1
Nominal GDP (expenditure measure) 4.2 6.2 4.8 5.4 5.0 4.2
GDP deflator 0.5 2.7 1.3 1.6 2.1 1.8
Potential GDP 2.7 3.2 3.3 3.0 2.9 2.6
Output gap (% deviation, June quarter)3 -0.5 -0.6 -0.1 0.5 0.3 0.0
Employment 2.3 5.1 2.5 2.0 1.8 1.3
Unemployment rate4 5.0 5.0 5.0 4.6 4.3 4.3
Participation rate5 69.7 70.4 70.3 70.0 69.9 69.8
Nominal wages6 2.1 1.2 2.6 2.3 2.2 2.1
CPI inflation7 0.4 1.8 1.6 2.1 2.2 2.1
Terms of trade8 -2.4 6.2 -0.2 0.0 0.4 0.2
House prices9 14.0 5.1 7.8 3.9 3.1 2.2
Current account balance            
     $billions -7.3 -7.4 -8.5 -9.7 -11.6 -12.7
     % of GDP -2.9 -2.8 -3.0 -3.3 -3.7 -3.9
Net International Investment Position
(% of GDP)
-64.4 -59.6 -59.9 -60.1 -60.9 -62.4
Household saving ratio (% of HHDI)10 -2.2 -0.7 -1.2 0.0 0.2 0.6
TWI11 73.6 76.1 76.6 76.9 76.7 74.7
90-day bank bill rate11 2.4 2.0 2.0 2.7 3.4 3.9
10-year bond rate11 2.7 3.1 3.6 4.0 4.2 4.3

Economic forecasts are presented on a June year basis for consistency with the fiscal forecasts. Longer time series for these variables are provided on page 135.

Notes:

  1. Business investment is the total of all investment types excluding residential building. Previous separations of market and non-market investment are no longer produced by Statistics New Zealand.
  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 merchandise basis.
  9. Quotable Value New Zealand (QVNZ) House Price Index, annual percentage change.
  10. Percent of household disposable income (HHDI), March years.
  11. Average for the June quarter.

Key economic forecast judgements and assumptions

  • Dairy prices are projected to fall slightly in the near term, and remain broadly stable over the medium term.
  • West Texas Intermediate (WTI) oil prices are assumed to rise from around US$52 per barrel in the March 2017 quarter to US$63 in the June 2021 quarter.
  • Net permanent and long-term migration inflows are assumed to decline from a peak of 72,500 per year in mid-2017 to Statistics New Zealand’s long-run assumption of 15,000 per year in 2022, outside of the forecast period.
  • Annual growth in the working-age population is assumed to average 2.0% per year over the forecast period, including the contribution of net migration.
  • Economy-wide multifactor productivity growth is assumed to average 0.7% per year over the 2018 to 2021 March years.[1]
  • Economy-wide labour productivity growth is assumed to average 1.4% per year over the 2018 to 2021 June years.[1]
  • Annual average growth in potential output is projected to average 3.0% over the forecast period.
  • The assumed neutral level of the 90-day interest rate is around 4.5% by the end of the forecast period.
  • The non-accelerating inflation rate of unemployment (NAIRU) is assumed to be around 4.25% at the end of the forecast period.
  • Increases in the tobacco excise tax in the March quarter each year are estimated to contribute 0.2 percentage points to annual Consumers Price Index (CPI) inflation for each of the next three years.

Notes

  • [1]Changes to the Household Labour Force Survey design in the June 2016 quarter have affected growth rates for employment and hours worked. These act to pull down productivity growth in the year to June 2017. See the Implications of changes to the Household Labour Force Survey box in the Half Year Update 2016 (page 15) for further explanation.
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