Fiscal Outlook (continued)

New Zealand's economic and fiscal outlook in an international context

New Zealand fared better than many developed economies following the global financial crisis (GFC), but its recovery is expected to be subdued, as in most developed economies. The GFC also had an impact on the Government's fiscal position, but less than for some countries, reflecting its stronger initial position.

Economic impact of the crisis

The New Zealand economy entered recession before the impact of the GFC as a result of a drought in the summer of 2007/08 and a tightening of monetary policy in response to increasing inflation. The economy recorded five successive quarters of economic contraction from March 2008 to March 2009, with a decline in production GDP of 3.5%. So far, New Zealand has recorded five quarters of expansion, totalling 2.1% growth, but it is not expected to regain its previous level of output until the first quarter of 2011 (Figure 1.11).

The downturn in New Zealand was relatively mild compared with other Organisation for Economic Co-operation and Development (OECD) economies, with the peak-to-trough decline ranked the seventh smallest out of 33 countries. The main reasons for this lesser impact were the soundness of the financial sector in New Zealand and the economy’s dependence on soft commodity exports and close trade links with Australia and China, both of which performed strongly through the GFC. The monetary policy response in New Zealand also lessened the impact of the GFC on the economy.

*  South Korea, Taiwan, Hong Kong, Singapore, Indonesia, Malaysia,Philippines, Indonesia and India, weighted by NZ export shares.

Sources: Statistics New Zealand, IMF, the Treasury

Figure 1.11 - Downturn and recovery

Sources: Statistics New Zealand, IMF, the Treasury

New Zealand's recovery from the downturn is expected to be gradual, chiefly because of the consolidation by households, businesses and government. This is in line with the major developed economies, apart from Australia where a robust recovery is expected given its close integration with emerging Asia, particularly China. Australia experienced only one quarter of negative growth following the GFC, supported by a strong financial sector, ample monetary and fiscal stimulus and a resumption of demand for minerals from China, which is leading to a surge in investment in the mining sector and higher terms of trade that are supporting growth in private consumption (Table 1.9).

We expect growth to slow slightly from high levels in China as steps are taken to control inflation and cool the property market. Strong growth has been led by infrastructure investment and exports. After their sharp dip immediately following the GFC as global demand for manufactured goods fell and stocks were run down, the economies of emerging Asia (ex China) recovered rapidly but are not expected to sustain that rate of growth. Nevertheless, their growth rate will remain much higher than the developed economies.

Generally, the developed economies are expected to experience long, slow recoveries because of a range of factors, some of which are more important for some than for others. We expect the rate of recovery in the United States (US) to be constrained by household consolidation, a weak labour market and further adjustment in the housing market. The financial sector is still weak and the Government must reduce its ongoing deficits some time.

The outlook for the recovery in the Euro area and the United Kingdom (UK) is muted as the region copes with financial sector weakness, sovereign debt and the possible negative short-term effects of fiscal consolidation in the UK and some parts of the Euro area. The housing market in the UK and parts of Europe is weak and will take time to recover.

The recovery in Japan is also expected to be sluggish. Japan's economy was already in a weak position prior to the GFC and it was affected directly by the sharp contraction in emerging Asia as manufacturing was cut back and stocks were reduced. Following reasonably rapid growth in 2010, the recovery is expected to falter as domestic demand is hampered by deflation and lower external demand by the appreciation of the yen.

Comparing fiscal performance

Similar to its economic performance, New Zealand's fiscal performance through the GFC wasbetter than some but worse than the best performers. Prior to the crisis, New Zealand was one of a handful of countries running a surplus on its financial balance.^[5] Reflecting the combined impact of prior policy decisions and the recession on revenues, the financial position moved into substantial deficit in the 2009 June year. This pattern was mirrored in most other developed economies (Figure 1.12).

Figure 1.12 - General government financial balance

Sources: OECD Economic Outlook 88, the Treasury

Figure 1.13 - General government net debt

Sources: IMF Fall Fiscal Monitor 2010, the Treasury

Note: New Zealand data are for the System of National Accounts (SNA) general government sector (central plus local government, excluding State Owned Enterprises (SOEs) and Local Authority Trading Enterprises (LATEs)) derived from a Generally Accepted Accounting Principles - (GAAP) based proxy indicator applied to historical Statistics New Zealand (SNZ) data and refer to years ended 31 March (30 June for net debt). The figures shown in the graphs are from the Half-Year Update forecasts. Data for other economies are general government financial balance and refer to calendar years.

New Zealand's fiscal deficit is expected to peak this year, before declining gradually over the next few years and moving into surplus in 2016 June year. Australia is expected to return to surplus a few years earlier. Some other countries, which have been more-severely affected by recession, are forecast to face a much longer period of large deficits.

These developments are reflected in net debt movements. Although continuing to rise through to the middle of the decade, New Zealand’s level of net debt is expected to remain low by the standards of many OECD economies. Net debt in the major advanced economies is expected to reach an average 90% of GDP in 2015, significantly higher than the New Zealand peak (Figure 1.13). Relative to other smaller advanced economies, New Zealand’s forecast level of net debt is either comparable or slightly lower.