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Budget 2017 Home Page Budget Economic and Fiscal Update 2017

Scenario Two - Higher household saving lowers domestic demand and weakens the fiscal position 

In this scenario we illustrate the implications for the economic and fiscal outlook from a desire by households to reduce balance sheet risk.

We assume that bank funding costs increase by around 50 basis points by the end of the year and that this leads households to reassess the affordability of their current debt obligations. Higher funding costs might occur if financial markets anticipated a faster pace of monetary policy normalisation in the US or if financial volatility increased due to renewed concerns about global growth.

In this scenario, the rise in bank funding costs, which is reflected in higher mortgage rates, causes households to lower their consumption and increase their saving as they seek to reduce their exposure to further interest rate increases, particularly those households servicing large debt (Figure 3.7). Higher interest rates also dampen household expectations of the outlook for the growth of house prices and their wealth, which lowers residential investment growth. Expectations of lower household demand and higher interest costs also reduce business investment. With weaker domestic demand, imports are also weaker. The policy interest rate is projected to be unchanged until mid-2019. In sum, real GDP growth is around 0.4 percentage points weaker in both the 2018 and 2019 June years than in the main forecast (Table 3.1). 

Figure 3.7 - Household saving is higher
Figure 3.7 - Household saving is higher.
Sources: Statistics New Zealand, the Treasury

In the labour market, this translates into lower employment growth, higher unemployment and slower wage growth (Figure 3.8). CPI inflation is lower by around 0.5 percentage points per year. Overall, nominal GDP is around $23 billion lower over the forecast period. Core Crown tax revenue is $7.5 billion lower. 

Figure 3.8 - The unemployment rate is higher 
Figure 3.8 - The unemployment rate is higher.
Sources: Statistics New Zealand, the Treasury

As in Scenario One, we assume that the Government's operating and capital allowances are unchanged from those in the main forecast (see Chapter 2 for details). Under these assumptions, OBEGAL surpluses are smaller but increase to $4.2 billion (1.3% of GDP) in 2021, and net debt is higher (Table 3.1).

Table 3.1 - Summary of economic and fiscal variables for main forecasts and scenarios
June years 2017
Forecast
2018
Forecast
2019
Forecast
2020
Forecast
2021
Forecast

Real GDP (aapc)

         
Main forecast 3.1 3.5 3.8 2.9 2.4
Scenario One: Higher migration 3.1 3.7 3.9 3.1 2.9
Scenario Two: Higher household saving 3.0 3.2 3.3 2.7 2.6

Nominal GDP

         
Main forecast (aapc) 6.2 4.8 5.4 5.0 4.2
     ($billions) 268.9 281.8 297.0 311.9 324.9
Scenario One: Higher migration (aapc) 6.3 5.5 5.9 5.6 5.1
     ($billions) 269.1 284.0 300.9 317.6 333.8
Scenario Two: Higher household saving (aapc) 6.2 4.2 4.4 4.2 4.2
     ($billions) 268.7 280.0 292.3 304.7 317.4

Operating balance before gains and losses

         
Main forecast (% of GDP) 0.6 1.0 1.4 2.0 2.2
      ($billions) 1.6 2.9 4.1 6.1 7.2
Scenario One: Higher migration (% of GDP) 0.6 1.2 1.8 2.5 3.0
     ($billions) 1.7 3.5 5.3 8.1 10.2
Scenario Two: Higher household saving (% of GDP) 0.6 0.8 0.8 1.1 1.3
     ($billions) 1.6 2.3 2.5 3.3 4.2

Net core Crown debt (% of GDP)

         
Main forecast 23.2 22.8 22.1 20.6 19.3
Scenario One: Higher migration 23.1 22.3 21.2 19.0 16.8
Scenario Two: Higher household saving 23.2 23.1 23.2 22.7 22.3

aapc = annual average % change

Source: The Treasury

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