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Economic and Fiscal Forecasts December 2008

Economic and Fiscal Forecasts

Overview

The world economic environment has changed…

The world economy has changed rapidly. It is vastly different from that of recent years and much weaker than the outlook incorporated in the Budget Update forecasts seven months ago. The financial market upheaval this year represents one of the largest shocks to the world economy since World War II and the full impacts are still to work through.

The shock has affected the expectations of businesses, households and governments worldwide, and led to huge volatility in markets. For example, stock markets in New Zealand and the United States have fallen as much as 36% and 42% respectively this year, world oil prices have varied between nearly US$150 and just over US$40 per barrel in the past six months and spot world dairy prices have fallen 43% since their peak in November 2007.

Exactly how long disruptions in financial markets will continue and the length and depth of the impact on world growth is uncertain. Although not independent, this is complicated by the fact that the shock has hit at a time when a number of countries, including New Zealand, have imbalances such as large current account deficits which they have to reduce. Judgements around such factors therefore have significant impacts on the outlook for an economy. The main forecasts presented here represent the Treasury's view of the most likely path the New Zealand economy will take over the next several years. In addition, two alternatives are presented that fall within the range of possible paths for the economy.

…resulting in a smaller New Zealand economy than previously forecast

With the outlook for growth in New Zealand's trading partners being progressively revised down, the outlook for the New Zealand economy is weaker. The December Update predicts a smaller nominal economy than past forecasts. This means that forecast tax revenue is lower, leading to an increase in the size of fiscal deficits and large increases in debt.

Table 1 - Forecast developments over 2008
  2008
Est./Actual
2009
Forecast
2010
Forecast
2011
Forecast
2012
Forecast
2013
Forecast

Nominal expenditure GDP ($billion, March year)

Budget Update 178 184 190 199 209 -
Pre-election Update 178 183 189 197 208 218
December Update 178 180 183 191 202 214

Real production GDP (AAPC, March year)

Budget Update 3.1 1.5 2.3 3.2 3.0 -
Pre-election Update 3.0 0.1 1.8 3.3 3.4 3.1
December Update 3.2 0.3 0.8 2.9 3.9 3.8

Unemployment rate (%, March quarter)

Budget Update 3.5 3.7 4.4 4.5 4.3 -
Pre-election Update 3.7 4.4 5.1 5.1 4.8 4.6
December Update 3.7 4.7 6.4 6.2 5.4 4.6

OBEGAL 1 (% GDP, June year)

Budget Update 2.9 0.7 0.5 0.2 0.1 -
Pre-election Update 3.1 0.0 -0.9 -1.2 -1.5 -1.5
December Update 3.1 -0.3 -2.2 -3.1 -3.1 -2.9

Gross debt2 (% GDP, June year)

Budget Update 17.6 17.5 16.8 17.8 16.8 -
Pre-election Update 17.4 17.4 18.0 21.9 23.1 24.3
December Update 17.5 19.2 21.0 26.0 29.4 33.1

Net debt3 (% GDP, June year)

Budget Update 1.0 2.5 3.8 5.0 6.2 -
Pre-election Update 0.0 2.8 5.3 8.0 10.6 13.2
December Update 0.0 3.1 7.2 12.2 16.5 20.7

Notes:

  • 1 Operating balance before gains and losses.
  • 2 Gross sovereign-issued debt excluding Reserve Bank Settlement Cash.
  • 3 Gross debt after deducting financial assets.
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