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The economic environment is stronger than previously expected

The Half Year Update forecasts higher economic activity and prices over the forecast period relative to the Budget. The Budget forecasts, which were finalised in mid-April, were made at a time of global pessimism and a large amount of uncertainty. The outlook incorporated in these forecasts reflects stronger economic activity and price inflation in New Zealand and abroad than was predicted in the Budget and a judgement that the recovery in the world economy will be faster than previously expected. The upward revision to real GDP growth is largely confined to the short term.

The New Zealand economy experienced its longest recession since the 1970s...

The New Zealand economy entered recession in early 2008 ahead of most of the developed world. Drought reduced agricultural production, high interest rates led to a fall in residential investment, a high exchange rate constrained exports and rising food and fuel prices curtailed consumer spending. The recession intensified in the December 2008 and March 2009 quarters reflecting the global financial crisis. New Zealand was vulnerable to this shock and the associated world economic downturn because of international linkages and the economy’s high level of reliance on overseas borrowing.

The impact on New Zealand was transmitted through the reduced availability and higher cost of credit, a sharp drop in business confidence to a 40-year low, and a smaller drop in consumer confidence. The global downturn also contributed to a fall in export demand and in export prices, which lowered New Zealand's terms of trade, and declines in equity and house prices, which reduced household wealth. As a result, real GDP fell by a total of 2.9% over five consecutive quarters in the deepest recession in New Zealand since 1991 and the longest since the 1970s.

...although, together with Australia, was less affected than most nations...

However, New Zealand's recession was one of the shallowest in the OECD. The most significant impacts of the global crisis were avoided as the Australasian financial system remained sound, notwithstanding the collapse of some finance companies in New Zealand. The Reserve Bank of New Zealand reduced the Official Cash Rate by nearly six percentage points from 8.25% as recently as July 2008 to 2.5% by April 2009, while the exchange rate fell from a peak above US$0.80 in early 2008 to below US$0.50 a year later. Fiscal policy was also stimulatory during the recession, partly reflecting personal income tax cuts on 1 October 2008 and 1 April 2009 and the bringing forward of infrastructure projects.

Additional factors underpinning the domestic economy were higher net migration inflows as departures fell when overseas job prospects weakened, a relatively small fall in house prices and an unemployment rate that remained well below levels seen in previous recessions despite rising sharply from 3.5% to 6.5%. Overall exports also held up owing to ongoing demand from China, a recovery in agricultural output from the previous year's drought and a lesser dependence on manufacturing exports than many other economies.

The Australian economy is expected to avoid contraction in 2009 for the 18th consecutive year and this relatively strong performance benefited New Zealand. In particular, the number of tourists from Australia rose strongly, also attracted here by factors such as a good ski season and a favourable exchange rate, which offset weakness in other markets caused by the global downturn and H1N1 influenza.

Table 1.2 - Economic forecasts1
(Annual average % change, March years) 2009
Actual
2010
Forecast
2011
Forecast
2012
Forecast
2013
Forecast
2014
Forecast
Private consumption -0.8 -0.2 2.3 2.5 1.7 1.5
Public consumption 3.3 1.1 2.0 2.0 1.2 0.7
Total consumption 0.1 0.1 2.2 2.4 1.6 1.3
Residential investment -23.4 -7.3 24.5 16.1 6.6 1.9
Non-market investment 16.7 5.1 -3.1 -3.6 3.8 4.6
Market investment -4.7 -11.1 8.8 7.3 4.8 6.2
Total investment -8.8 -8.5 11.8 9.3 5.6 5.4
Stock change2 -0.2 -1.8 1.2 -0.1 0.0 0.2
Gross national expenditure -2.0 -3.2 4.9 3.9 2.6 2.6
Exports -3.3 0.4 -0.2 5.4 5.1 4.4
Imports -4.7 -13.3 9.7 7.7 3.7 3.7
GDP (expenditure measure) -1.5 0.8 2.5 3.1 3.0 2.8
GDP (production measure) -1.1 -0.4 2.4 3.2 3.0 2.8
Real GDP per capita -2.0 -1.5 1.1 2.2 2.1 1.9
Nominal GDP (expenditure basis) 1.1 1.7 4.8 5.2 4.9 4.9
GDP deflator 2.6 0.9 2.3 2.1 1.8 2.1
Output gap (% deviation, March year)3 0.2 -1.0 -1.0 -1.1 -0.8 -0.5
Employment 0.9 -1.8 -0.9 1.0 2.5 2.6
Unemployment4 5.0 7.0 6.9 6.0 5.3 4.8
Nominal wages5 5.3 2.8 3.1 2.8 2.7 2.9
CPI inflation6 3.0 2.5 2.3 2.2 2.3 2.0
Merchandise terms of trade7 -0.8 -8.1 3.6 2.2 1.0 1.3
Current account balance
  - $billion -14.6 -5.2 -10.3 -13.6 -14.9 -15.7
  - % of GDP -8.1 -2.9 -5.4 -6.8 -7.1 -7.1
TWI8 53.7 66.5 63.5 58.1 55.1 53.2
90-day bank bill rate8 3.7 2.9 3.9 4.9 5.4 5.8
10-year bond rate8 4.6 5.8 5.8 5.8 5.9 6.0

Notes:

  1. Forecasts finalised 6 November 2009
  2. Contribution to GDP growth
  3. Estimated as the percentage difference between real GDP and potential GDP
  4. Household Labour Force Survey, percent of the labour force, March quarter, seasonally adjusted
  5. Quarterly Employment Survey, average ordinary-time hourly earnings, annual percentage change
  6. Annual percentage change
  7. SNA basis, annual average percentage change
  8. Average for the March quarter

A longer time series for these variables is provided on page 129.

Sources: Statistics New Zealand, Reserve Bank of New Zealand, the Treasury

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