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Economic and Fiscal Forecasts December 2008

Main Forecasts

The outlook for global growth continues to weaken…

The financial crisis has deepened and the outlook for global growth has been revised down significantly since the Pre-election Update economic forecasts were finalised at the end of August. In September, governments in the United States and the United Kingdom were involved in supporting a number of financial institutions and in October the intensified crisis spread to other parts of the world, with financial institutions in Europe and other countries affected. The impact of the financial crisis on the real economy has become more apparent with the United Kingdom, Euro zone and Japan falling into recession in the middle of 2008 and the United States economy contracting in the third quarter. Although governments and central banks have reacted to the crisis with fiscal and monetary stimulus, the outlook for world economic growth has been revised down sharply since the Pre-election Update.

Weaker world conditions are adding to the difficulties New Zealand is experiencing as it shifts to growth that is driven by more sustainable fundamentals than has occurred over much of the past decade. During this time consumers in New Zealand and in many other developed countries have accumulated considerable levels of debt in an environment where credit was easily obtained at attractive rates and rising house prices provided a sense of security for many homeowners.

…resulting in a period of lower growth for the New Zealand economy

Figure 1 - Real gross domestic product
Figure 1 - Real gross domestic product.
Sources: Statistics New Zealand, the Treasury

New Zealand is forecast to experience a period of weak economic growth over the next couple of years as the economy is affected by low global growth and unwinds past imbalances. Real production GDP is forecast to grow by 0.3% in the March 2009 year. Growth is expected to remain weak over the 2010 March year at 0.8%, down from 1.8% in the Pre-election Update. Real GDP growth is expected to lift to around 3% in 2011 and just below 4% in 2012 and 2013, as growth in our trading partners recovers and monetary and fiscal policy responses help confidence to recover. As this occurs export and investment growth are expected to increase.

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