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Budget 2017 Home Page Budget Economic and Fiscal Update 2017

The Economic Outlook

Real GDP growth expected to peak in early 2019

Continuing high inward migration, construction activity (including rebuild activity related to the Kaikōura earthquake), exports (particularly tourism) and low interest rates are expected to underpin real GDP growth of around 3% to 3.5% over the year ahead. Growth is expected to peak at 3.8% in 2019, as residential investment growth resumes after a temporary pause in 2017 and as the stimulatory impact of the Government's Family Incomes Package flows through the economy via higher household spending (see the Economic and fiscal impact of the Family Incomes Package box on page 21). Unemployment is broadly flat over the year ahead, as employment growth is balanced by high labour force growth, before the unemployment rate steadily declines. Underlying inflation picks up over the forecast period as spare capacity is used up, with headline inflation stabilising around 2% from mid-2019. The aggregate growth outlook for New Zealand is stronger than in the Half Year Update, but revisions to the starting point level of real production GDP mean the level of real GDP only surpasses the Half Year Update forecast in mid-2019.

Figure 1.2 - Real production GDP
Figure 1.2 - Real production GDP.
Sources: Statistics New Zealand, the Treasury

Stronger for longer migration…

Net migration has continued to outpace expectations, with annual net migration rising to 71,900 in the year to March 2017. Net migration is assumed to hold up at a higher level than forecast in the Half Year Update given New Zealand's relatively favourable economic conditions and the persistent strength of recent net inflows, peaking at 72,500 in mid-2017.

Thereafter, net migration inflows are assumed to ease. Flows of New Zealanders are assumed to return to their long run average net outflow in line with real wage differentials between New Zealand and Australia. Net inflows of non-New Zealanders are assumed to fall as New Zealand's attractiveness relative to other locations declines, and as some recent migrants leave (eg, students). Net migration is expected to add 212,000 people to the population over the next four and a half years, similar to the gain over the past four and a half years. Relative to the Half Year Update, net migration is assumed to decline more gradually (adding around 67,000 more people), with risks to the forecast present in both directions.

Figure 1.3 - Net migration
Figure 1.3 - Net migration.
Sources: Statistics New Zealand, the Treasury

Population growth is a key driver of economic growth. Average GDP per capita growth over the forecast period (1.3%) is similar to that forecast in the Half Year Update (1.4%), but the level of real GDP per capita is lower throughout, as revisions to history have led to a lower starting point (see the GDP revisions and their implications box on page 9). Scenario Two in the Risks and Scenarios chapter explores the implications should migration levels deviate significantly from those assumed.

…increases labour supply…

Unemployment is forecast to remain flat over the year ahead, as rapid labour force growth (from a combination of high working-age population growth and record-high participation rates) is balanced by robust employment growth (with 215,000 additional people employed over the forecast period), before steadily declining to the long run unemployment rate of 4.25%. Wage growth is relatively modest in the near term, reflecting some spare capacity in the labour market, past low inflation and relatively weak productivity growth, before picking up to over 2% in mid-2018 as price inflation picks up.

Figure 1.4 - Unemployment rate
Figure 1.4 - Unemployment rate.
Sources: Statistics New Zealand, the Treasury

Compared to the Half Year Update, employment growth is stronger over the forecast period. However, the labour force is forecast to increase at a faster rate, with higher participation rates and working-age population growth, meaning spare capacity in the economy is not used up as quickly as previously anticipated. This translates into a relatively higher unemployment rate and weaker wage growth over the remainder of the forecast period relative to the Half Year Update, and points to a softer near-term picture of non-tradables inflation.

…and drives private consumption…

Private consumption growth is expected to remain above its post GFC average over most of the forecast period, supported by population growth, low interest rates and higher farm incomes. The Family Incomes Package also provides a boost to household consumption, with households assumed to spend the majority of the boost to their incomes from this package (see the Economic and fiscal impacts of the Family Incomes Package box on page 21).

Figure 1.5 - Real private consumption
Figure 1.5 - Real private consumption.
Sources: Statistics New Zealand, the Treasury

In the latter half of the forecast period private consumption growth eases to around 2% per year as monetary conditions begin to tighten and household saving rises modestly, house price growth slows and as population growth eases with slower migration.

These forecasts assume households will continue their relatively cautious behaviour of recent years, keeping dissaving rates fairly close to zero, with consumption growth largely matched by income growth. The implications for the economic forecasts if households behave in a different manner are explored in Scenario Two in the Risks and Scenarios chapter.

Private consumption growth is stronger than expected at the Half Year Update over most of the forecast period. Data revisions post the Half Year Update have provided a higher starting point (see the GDP revisions and their implications box on page 9), and the Family Incomes Package increases household incomes and expenditure.

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