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Main forecasts

The economic expansion is expected to be more gradual compared to previous upturns…

Figure 1.1 - Real production GDP per capita
Figure 1.1 - Real production GDP per capita.
Sources: Statistics New Zealand, the Treasury

The New Zealand economy contracted over 2008 and early 2009, with output falling 3.5% from peak to trough. While the economy has been recovering since June 2009, GDP remains 1.5% below the pre-recession level. The fall in output per person was even larger at 4.9% and per capita output is not expected to return to its pre-recessionary peak until June 2012, significantly later than in the two previous recessions (Figure 1.1).

…characterised by modest household spending…

Figure 1.2 - Private consumption
Figure 1.2 - Private consumption.
Sources:  Statistics New Zealand, the Treasury

Household spending is expected to move in line with incomes, with real growth averaging just 2.4% per year and both real and nominal measures declining as a share of the economy (Figure 1.2). The outlook is forecast to be subdued when contrasted with spending last decade, some of which was financed through increased borrowing. High demand for imported goods and services, coupled with increased debt-servicing costs on a large stock of debt, saw the current account deficit lift to reach nearly 9% of GDP at the end of 2008, a manifestation of imbalances in the economy.

…with less reliance on borrowing…

Household credit growth has eased considerably since the onset of the 2008/09 recession and is expected to remain weak as borrowers continue to be averse to taking on more debt. While nominal house prices have fallen 5% since their peak at the end of 2007, they remain elevated relative to disposable income. House prices are expected to increase only gradually over the next five years, while falling in real terms through to 2013 as inflation exceeds nominal house price growth. With housing accounting for the majority of household wealth, borrowers will remain reticent about funding consumption out of wealth.

…and a stronger relationship with incomes

As householdwealth is expected to provide little support, developments in the labour market become the key driver of private consumption over the medium term. With changes in the job market lagging economic developments, the continued economic recovery is anticipated to translate into modest employment growth, with one-off factors, including the Rugby World Cup, driving stronger growth over the 2011 calendar year. Wage growth appears to have troughed and is expected to lift, supporting consumer spending, although rising inflation and interest rates will provide significant offsets.

Imports of goods and services are expected to rise in coming years, in line with the recovery in domestic demand, and are boosted significantly in the March 2012 year from the purchase of goods and materials owing to the rebuild following the Canterbury earthquake. A forecast depreciation of the New Zealand dollar is expected to limit import demand, particularly from the March 2012 year, as imported goods become more expensive.

Residential investment lifts owing to earthquake recovery and population growth

Residential investment is forecast to lift strongly in the March 2011 and 2012 years, with some of the increase accounted for by the rebuild following the Canterbury earthquake (see the box on the impacts of the earthquake on pages 22 and 23). Despite a theme of household consolidation and increasing interest rates, population growth and catch-up from recent low rates of investment support housing investment over the medium term.

Goods and Services Tax (GST) is collected on many of the components of consumption, and residential investment. A more subdued household sector than expected earlier in the year contributes to slower GST revenue growth relative to Budget 2010. However, the 1 October lift in the GST rate from 12.5% to 15.0% contributes to the amount of GST collected increasing sharply from its 2010 level.

Businesses have been deleveraging…

Business borrowing from banks has contracted sharply in recent times, with Reserve Bank of New Zealand (RBNZ) data showing a decline of $5 billion (6.6%) in the level of business credit in October 2010 compared with a year earlier. The decline in business borrowing is likely driven by a combination of some businesses strengthening their balance sheets by paying off debt, others postponing or cancelling investment in plant and machinery in response to uncertainty around the strength of the economic recovery, and a degree of conservatism among lenders. Some of the fall in business credit can also be put down to large corporates obtaining alternative funding by accessing capital markets.

…and are expected to remain cautious as the recovery progresses

Market investment experienced large falls during the recent recession, falling 22% between June 2008 and March 2010. Market investment is expected to pick up in the near term, driven by post-earthquake activity, a high exchange rate keeping prices low, improved profitability and necessary replacement investment following deferral over the past two years. Despite the boost to construction following earthquake-related repairs, market investment growth remains weaker than typically expected following such a large fall.

Table 1.2 - Economic forecasts1

(Annual average % change, March years) 2010
Actual
2011
Forecast
2012
Forecast
2013
Forecast
2014
Forecast
2015
Forecast
Private consumption 0.6 2.0 2.2 2.5 2.5 2.5
Public consumption 1.1 2.2 0.8 0.7 0.8 1.0
Total consumption 0.7 2.0 1.9 2.1 2.1 2.2
Residential investment -11.5 12.2 29.2 7.9 3.6 0.7
Non-market investment 8.3 -11.2 -3.6 3.8 4.6 4.1
Market investment -11.4 6.3 12.3 5.1 3.1 3.4
Total investment -9.7 7.0 16.0 6.1 3.6 3.2
Stock change2 -1.9 0.6 0.7 0.5 0.1 0.0
Gross national expenditure -3.3 3.2 5.9 3.6 2.6 2.4
Exports 3.2 1.8 4.5 3.0 2.8 2.9
Imports -9.5 6.0 10.5 5.0 2.4 2.0
GDP (expenditure measure) 0.5 2.2 3.9 2.9 2.7 2.7
GDP (production measure) -0.4 2.2 3.4 2.9 2.7 2.7
Real GDP per capita -1.6 1.1 2.4 2.0 1.8 1.8
Nominal GDP (expenditure basis) 1.7 6.4 5.7 5.5 5.2 4.7
GDP deflator 1.3 4.1 1.7 2.5 2.4 1.9
Output gap (% deviation, March qtr)3 -1.2 -0.4 -0.2 -0.5 -0.5 -0.3
Employment -1.3 1.3 1.7 1.8 1.7 1.5
Unemployment4 6.0 6.1 5.2 4.9 4.6 4.5
Nominal wages5 2.2 2.9 3.6 4.2 4.1 3.8
CPI inflation6 2.0 4.5 2.9 2.6 2.2 2.0
Merchandise terms of trade7 -6.3 7.0 -2.7 1.8 1.9 1.3
Current account balance
  - $billion -4.5 -3.9 -10.1 -15.1 -15.3 -14.2
  - % of GDP -2.4 -2.0 -4.8 -6.8 -6.6 -5.8
Net international investment position
  - $billion -161.0 -166.4 -177.4 -192.5 -207.2 -221.3
  - % of GDP -85.9 -83.5 -84.2 -86.6 -88.6 -90.4
TWI8 65.3 68.7 63.1 59.1 55.6 53.0
90-day bank bill rate8 2.7 3.3 4.5 5.0 5.0 5.0
10-year bond rate8 5.9 5.2 5.3 5.4 5.4 5.5

Notes:

1 Forecasts finalised 5 November 2010

2 Contribution to GDP growth

3 Estimated as the percentage point 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 124.

Sources: Statistics New Zealand, RBNZ, the Treasury

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