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Half Year Economic & Fiscal Update 2009

Finalisation dates and assumptions for the forecasts and projections

Economic and fiscal forecasts - finalisation dates
Economic forecasts 6 November
Tax revenue forecasts 12 November
Fiscal forecasts 25 November
Text finalised 8 December

Economic forecast assumptions

Trading partner growth - The global outlook has changed significantly since the low point in activity earlier in the year when Budgetforecasts were finalised. After an estimated contraction of 1.5% in 2009, the economies of New Zealand's top-12 trading partners are expected to grow 2.9% in 2010, 3.2% in 2011 and 3.4% in 2012, before settling at growth of 3.2% in the final two years of the forecast period. These are similar to growth rates in Consensus Forecasts forOctober 2009, although are slightly lower than those for November 2009 released after the economic forecasts were finalised. Given there is continued uncertainty around these numbers, we consider scenarios based on different rates of trading partner growth.

Global inflation and interest rates - Inflation has declined dramatically from a year ago in most economies and the outlook remains subdued as the recovery in the world economy is expected to be gradual. The subdued inflation environment is expected to lead to low interest rates over the forecast period, although they are expected to be gradually normalised over time.

Figure 1.17 - WTI oil prices
Figure 1.17 - WTI oil prices   .
Source:  Datastream, the Treasury

Oil prices - The average price of West Texas Intermediate (WTI) oil on a quarterly basis troughed at US$43/barrel in the March 2009 quarter and rose to US$68/barrel in the September quarter as demand picked up in line with the world economy. Based on the average futures prices for WTI oil in October 2009, the price of oil is assumed to rise to US$87/barrel by the end of the forecast period. Over most of the forecast period, the oil price assumption contained in the Half Year Update is approximately 25% above that assumed in the Budget forecasts(Figure 1.17).

Terms of trade - The merchandise terms of trade (as measured in the System of National Accounts) are estimated to trough in the September 2009 quarter, nearly 14% below their March 2008 peak. They are then assumed to rise gradually over the forecast period to be 11% higher in the June 2013 quarter than in the September 2009 quarter.

Monetary conditions - The New Zealand dollar exchange rate is expected to have appreciated to 66.5 on the TWI in the December 2009 quarter and is assumed to remain at this level throughout the first half of 2010. The TWI is then assumed to depreciate over the forecast period to 53. Ninety-day interest rates are expected to rise to 3.3% in the June quarter of 2010 and 4.3% a year later and continue to increase to 5.9% at the end of the forecast period.

External migration - The net inflow of permanent and long-term migrants is assumed to increase from just under 17,000 in the year to September 2009 to 24,400 in the year to March 2010 before falling to 10,000 per annum by early 2012.

Policy - The Emissions Trading Scheme (ETS) is assumed to impact on consumer prices both directly and indirectly over the forecast period. We estimate an impact on consumer price inflation of about 0.4 percentage points in the June 2011 year as the ETS impacts on the price of stationary energy (eg, coal, gas and geothermal) and fuel prices, with a further impact of about 0.4 percentage points in the 2013 calendar year, as waste is included from January 2013 and the transition phase ends.

Fiscal forecast assumptions

The fiscal forecasts are based on assumptions and judgements developed from the best information available on 25 November 2009, when the forecasts were finalised. Actual events are likely to differ from some of these assumptions and judgements. Furthermore, uncertainty around the forecast assumptions and judgements increases over the forecast period.

The fiscal forecasts are prepared on the basis of underlying economic forecasts. Such forecasts are critical for determining revenue and expense estimates. For example:

  • a nominal GDP forecast is needed in order to forecast tax revenue
  • a forecast of CPI inflation is needed because social assistance benefits are generally indexed to inflation
  • an unemployment forecast is needed to underpin the projected number of unemployment benefit recipients, and
  • forecasts of interest rates are needed to forecast finance costs, interest income and discount rates.

A summary of the key economic forecasts that are particularly relevant to the fiscal forecasts is provided in the table below (on a June-year-end basis to align with the Government's balance date).

Table 1.11 - Summary of key economic forecasts used in fiscal forecasts
June years 2009/10 2011/12
Half Year Forecasts
Half Year Forecasts
Half Year Forecasts
Half Year Forecasts
Budget Forecasts Half Year Forecasts
Real GDP (P) (ann avg % chg) -0.8 0.7 2.6 3.3 3.0 2.8
Nominal GDP (E) ($m) 175,051 184,466 193,966 203,873 213,738 223,980
CPI (annual avg % change) 1.9 2.2 2.1 2.2 2.2 2.1
Govt 10-year bonds (ann avg %) 5.2 5.8 5.8 5.8 5.9 6.0
5-year bonds (ann avg %) 4.4 5.0 5.4 5.6 5.8 5.9
90-day bill rate (ann avg %) 2.5 2.9 3.8 4.8 5.3 5.7
Unemployment rate (HLFS) basis ann avg %) 7.1 6.9 6.9 6.1 5.4 4.9
Total employment (ann avg % change) -3.8 -1.9 -0.5 1.5 2.7 2.5
Current account (% of GDP) -6.6 -3.6 -5.8 -6.9 -7.2 -6.8
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