Growth slows after a long expansion (continued)
The economy continues to operate at or above potential
- Figure 1.4 – Measures of the output gap
- Source: The Treasury
Even with the slower growth from late 2005, the economy remains at or above its potential level of output. Capacity utilisation is just below its recent peaks and businesses are experiencing increasing difficulty finding staff. Wage pressures are high, input costs – especially for non-tradable items – are increasing steadily and firms’ pricing intentions point to continuing inflationary pressure. The output gap (a measure of how far above potential the economy is) is estimated to be positive on two main indicators (Figure 1.4).
Tax revenues continue to grow
- Figure 1.5 – Tax component growth
- Source: The Treasury
Higher growth in nominal GDP led to faster growth in tax revenues in the recent period, especially in the June quarter 2007 (Figure 1.5). Corporate tax growth was flat to slightly negative through much of 2006 and then accelerated through the first half of 2007. The pick-up in corporate tax appears to be related more to investment returns than what would usually be thought of as business profits.
GST growth also increased markedly towards the end of the June 2007 year, with the level of GST 10% higher in the 2007 June quarter compared with the 2006 June quarter, after hovering around the 5% mark through the previous three quarters. The unusually high growth in the June quarter may be related to the recovery in domestic consumption and increased residential investment through the first half of 2007.
With unemployment remaining low and wage growth high, source deductions (the largest single tax type) maintained steady growth through the June 2007 year. Although growth was down on the previous year, source deductions still grew by 7.5% in the year to June 2007. Overall, growth in total tax revenue declined through the end of 2006, but recovered again through the first half of 2007 on the back of the acceleration of GST and corporate tax.
| Annual average % change, year to 31 March |
2007 Actual |
2008 Estimate |
2009 Forecast |
2010 Forecast |
2011 Forecast |
2012 Forecast |
|---|---|---|---|---|---|---|
| Private consumption | 2.4 | 3.8 | 2.2 | 2.6 | 1.5 | 1.1 |
| Public consumption2 | 4.1 | 2.8 | 3.6 | 4.2 | 4.0 | 3.8 |
| Total consumption | 2.8 | 3.6 | 2.5 | 2.9 | 2.1 | 1.8 |
| Residential investment | -2.1 | 5.7 | -3.9 | -5.0 | -1.6 | 1.0 |
| Central government investment | 1.2 | -8.6 | 16.5 | 2.5 | 2.0 | 2.0 |
| Other investment | -3.3 | 5.6 | 4.9 | 1.1 | 2.0 | 3.5 |
| Total investment | -3.1 | 4.9 | 3.8 | 0.0 | 1.3 | 3.0 |
| Stock change3 | -0.7 | 0.8 | -0.1 | 0.4 | 0.0 | 0.0 |
| Gross national expenditure | 0.7 | 4.7 | 2.7 | 2.6 | 1.8 | 2.0 |
| Exports | 3.0 | 1.6 | 2.6 | 3.4 | 3.7 | 4.0 |
| Imports | -1.4 | 6.1 | 4.0 | 2.7 | 1.3 | 1.4 |
| GDP (production measure) | 1.7 | 3.0 | 2.1 | 2.8 | 2.7 | 2.9 |
| - annual % change | 2.5 | 2.3 | 2.3 | 2.8 | 2.7 | 3.0 |
| Real GDP per capita | 0.5 | 2.0 | 1.1 | 1.8 | 1.7 | 2.0 |
| Nominal GDP (expenditure basis) | 4.7 | 7.3 | 5.4 | 4.1 | 4.2 | 4.6 |
| GDP deflator | 2.5 | 4.0 | 3.3 | 1.3 | 1.5 | 1.7 |
| Employment4 | 2.0 | 1.4 | 0.8 | 1.1 | 0.9 | 0.9 |
| Unemployment5 | 3.7 | 3.8 | 3.8 | 3.9 | 4.1 | 4.1 |
| Wages6 | 4.8 | 4.2 | 4.4 | 4.4 | 4.2 | 3.9 |
| CPI inflation7 | 2.5 | 3.1 | 2.8 | 2.7 | 2.6 | 2.5 |
| Export prices8 | 9.1 | 3.1 | 11.1 | 4.1 | 4.7 | 3.3 |
| Import prices8 | 7.2 | -4.4 | 2.5 | 6.0 | 6.5 | 4.6 |
| Current account balance | ||||||
| - $million | -13522 | -12963 | -11851 | -13804 | -14109 | -13552 |
| - % of GDP | -8.3 | -7.4 | -6.4 | -7.2 | -7.0 | -6.5 |
| TWI9 | 68.8 | 70.0 | 67.0 | 62.2 | 58.9 | 57.1 |
| 90-day bank bill rate9 | 7.8 | 8.5 | 8.5 | 8.3 | 8.0 | 7.4 |
| 10-year bond rate9 | 5.9 | 6.4 | 6.5 | 6.7 | 6.6 | 6.4 |
Notes:
1 Forecast finalised 8 November 2007 incorporating data up until 2 November 2007.
2 The forecast profile for public consumption is influenced by government defence spending.
3 Contribution to GDP growth.
4 Household Labour Force Survey, full-time equivalent employment.
5 Household Labour Force Survey, percentage of the labour force, March quarter, seasonally adjusted.
6 Quarterly Employment Survey, average ordinary time hourly earnings.
7 Annual percentage change.
8 Overseas Trade Index basis, annual average percentage change.
9 Average for the March quarter.
Sources: Statistics New Zealand, Reserve Bank of New Zealand, The Treasury
Outlook is for continuing but easing growth
The most likely path for the economy is continuing but easing growth
- Figure 1.6 – Real GDP
- Sources: Statistics New Zealand, The Treasury
The most likely path for the economy is continuing but slowing growth until late 2008, when the rate of expansion will start to return towards its trend rate of around 3%. The robust growth in late 2006-early 2007 will boost the annual average rate of growth to 3.0% in the year to March 2008, but it will decline to 2.1% in the year to March 2009 before increasing again to 2.9% in the year to March 2012 (Figure 1.6). The key international and domestic influences determining the development of the economy are discussed in the following two sections. Considerable uncertainties surround this view and they are discussed in the Risks and Scenarios chapter.
