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Half Year Economic and Fiscal Update 2010

Economic and Fiscal Update


Economic outlook

Growth has been weaker than forecast at Budget and activity is anticipated to have lifted only gradually over the second half of 2010. The economic recovery is expected to continue to be gradual, with growth weighed down by subdued domestic demand. Temporary factors and events are expected to lift growth to 3.4% in the March 2012 year, but the current expansion is forecast to be weaker than recent recoveries, with growth expected to be slightly under 3% beyond 2012.

The outlook is characterised by muted growth in private consumption as households are expected to remain cautious in their spending and investment decisions. Business investment is forecast to increase from current levels, boosted by the earthquake recovery and a degree of catch-up by firms. Even so, the forecast recovery is weaker than what would typically have been expected following the sharp contraction that occurred during the recent recession. Government spending is also expected to be restrained, reflecting difficult fiscal circumstances.

Goods exports have been stronger than forecast at Budget 2010, reflecting increased demand for commodities such as dairy and meat. Strong demand has also been reflected in elevated prices for these goods. While this helps to partially offset the weaker outlook for domestic demand than at Budget 2010, the export response is expected to be gradual, constrained by the high exchange rate and the pace at which commodity production can increase. As a result, economic growth is forecast to continue, but at a slower rate than anticipated earlier this year.

The current account deficit is expected to widen as import demand increases and rising firm profitability sees greater income accruing to overseas owners of New Zealand firms. However, the current account deficit is not expected to widen to the same degree as in Budget 2010, contributing to a lower level of external indebtedness than at Budget 2010.

Slightly weaker real activity and lower prices for consumer goods and services than anticipated earlier in the year contribute to nominal Gross Domestic Product (GDP) being lower over the coming five years than was expected at Budget 2010.

Short-term uncertainties include the impact of the Canterbury earthquake, adverse weather conditions as well as the recently implemented tax reforms. In such an environment, households and businesses may exercise considerably more caution than is anticipated in the main forecasts.

The global economy remains a major source of uncertainty and risk. The recovery from the global financial crisis (GFC) remains fragile, with the current turmoil in Europe being one source of downside risk. On the other hand, New Zealand's exposure to fast-growing developing markets and the Australian economy means that the risks associated with developments in our trading partners are not all negative. These risks in relation to the international outlook are explored as alternative scenarios.

Fiscal outlook

The fiscal position has weakened significantly since 2008, with tax revenues falling as the economy contracted and income tax cuts taking effect. Core Crown expenditure has increased primarily owing to past policy decisions; for example, KiwiSaver and Working for Families, and the indexation of benefits. Operating deficits continue to widen in the current year reflecting one-off expenditure such as that associated with the Canterbury earthquake and the Weathertight homes scheme, as well as weaker tax growth stemming from the slower economic recovery. An operating deficit (before gains and losses) of 5.5% of GDP is expected in the current fiscal year.

The deficit then narrows as the economy recovers and slower growth in expenditure is expected. The operating balance (before gains and losses) is forecast to break even in the June 2015 year, with the first surplus of note projected for the June 2016 year.

A sustained period of cash deficits is expected, with net debt forecast to double from 14.1% of GDP in June 2010 to 28.5% of GDP by June 2015. Net debt is then projected to return to the Government's long-run target of 20% of GDP in June 2022, in line with Budget 2010 projections.

Table 1.1 - Summary of the Treasury's economic and fiscal forecasts

Economic (March years, %)

Economic growth1 -0.4 2.2 3.4 2.9 2.7 2.7
Consumer price inflation2 2.0 4.5 2.9 2.6 2.2 2.0
Unemployment rate3 6.0 6.1 5.2 4.9 4.6 4.5

Fiscal (June years, % of GDP)

Operating balance4 -3.3 -5.5 -2.8 -1.9 -0.6 0.0
Net debt5 14.1 20.8 24.2 26.5 27.8 28.5
Net worth6 50.2 42.4 38.3 35.3 34.0 33.6


1 Real production GDP, annual average percentage change

2 Consumers Price Index (CPI), annual percentage change

3 Percent of labour force, March quarter, seasonally adjusted

4 Total Crown operating balance before gains and losses

5 Net core Crown debt excluding the New Zealand Superannuation Fund and advances

6 Total Crown net worth

Sources: Statistics New Zealand, the Treasury

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