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Half Year Economic and Fiscal Update 2012

Economic Outlook

Overview

Figure 1.1 - Real GDP growth
Figure 1.1 - Real GDP growth.
Sources:  Statistics New Zealand, the Treasury

Data released since the Budget Update was finalised show that the New Zealand economy continued its recovery from the 2008/09 recession in the first half of 2012.

Real GDP rose by 1.6% in the six months to the end of the June quarter. This strength reflected some temporary factors, including favourable growing conditions for the agriculture sector, as well as a recovery in residential investment.

The economy is likely to expand at a slower rate in the second half of the year. This reflects an observed softening in business confidence and activity indicators in the September quarter, elevated unemployment, and previous falls in the prices of our primary exports - mainly dairy products - finally showing up in the export data.

The Treasury expects the pace of GDP growth to strengthen throughout 2013, increasing to 2.9% in the year to March 2014. Despite this, growth will be uneven across the economy with variable outcomes across sectors and regions.

Growth will be supported by a substantial boost from the Canterbury rebuild, low borrowing costs, and ongoing solid demand and higher prices for our primary exports. For the first half of the forecast period, the high exchange rate will continue to constrain the New Zealand dollar earnings of exporters and import-competing firms. The tourism sector will be additionally constrained by ongoing weak income growth in traditional tourist source markets, the loss of tourism infrastructure in Christchurch, and New Zealanders taking advantage of the strong dollar to holiday abroad. In the retail sector, elevated unemployment and ongoing deleveraging are expected to see a continuation of moderate household consumption growth across the forecast period. Fiscal restraint will have a dampening effect on demand growth too.

As in most other advanced economies, the ongoing impacts of the global financial crisis are likely to constrain the pace of economic growth in the medium term. Economic growth is forecast to average 2.4% in the final years of the forecast period, down from 3.0% in the Budget Update.

The current account deficit is forecast to widen to 6.5% of GDP in the year ending March 2017, in part as a result of the Canterbury rebuild increasing investment. The assumed decline in the exchange rate towards the end of the forecast period contributes to the goods balance returning to surplus.

International outlook remains weak, with risks on the downside

Figure 1.2 - Trading partner growth
Figure 1.2 - Trading partner growth.
Sources:  IMF, the Treasury

The international economy broadly tracked in line with our Budget Update forecasts in the first six months of 2012, although the general trend since has been towards slower global economic growth. While New Zealand's increasing trade ties with China and other fast-growing Asian economies offset some weakness elsewhere, trading partner growth (TPG) in this Half Year Update is slower over the medium term than in the Budget Update forecasts.

Risks to the outlook from unanticipated international and domestic developments are explored in more detail in the Risks and Scenarios chapter.

Table 1.1 - Economic forecasts1
(Annual average % change,
March years)
2012
Actual
2013
Forecast
2014
Forecast
2015
Forecast
2016
Forecast
2017
Forecast
Private consumption 1.9 1.5 2.8 2.6 1.9 1.7
Public consumption 0.6 0.7 0.2 0.8 0.7 0.4
Total consumption 1.6 1.3 2.2 2.2 1.7 1.4
Residential investment -11.6 19.5 33.0 22.4 7.4 -0.6
Market investment 5.4 13.0 9.4 4.4 2.3 1.9
Non-market investment -12.1 -13.1 9.2 2.4 2.4 2.4
Total investment -1.0 12.9 14.4 7.7 3.5 1.5
Stock change2 0.7 -1.2 0.0 0.1 0.1 0.1
Gross national expenditure 2.2 1.6 5.1 3.7 2.3 1.5
Exports 2.6 1.9 0.5 1.2 2.1 2.7
Imports 6.3 2.0 6.6 4.2 1.6 0.3
GDP (expenditure measure) 1.1 1.7 3.0 2.5 2.4 2.4
GDP (production measure) 1.6 2.3 2.9 2.5 2.4 2.4
Real GDP per capita 0.7 1.5 2.1 1.6 1.4 1.4
Nominal GDP (expenditure measure) 3.4 3.6 5.9 4.7 4.1 4.1
GDP deflator 2.3 1.9 2.8 2.1 1.7 1.7
Output gap (% deviation, March quarter)3 -1.5 -1.5 -0.5 -0.3 -0.3 0.0
Employment 1.4 0.2 1.7 1.9 1.4 1.4
Unemployment4 6.7 6.9 6.2 5.9 5.6 5.1
Participation rate5 68.7 68.2 68.5 68.6 68.5 68.5
Nominal wages6 3.8 2.1 2.4 2.7 2.6 2.6
CPI inflation7 1.6 1.5 1.9 2.2 2.2 2.2
Merchandise terms of trade8 1.2 -2.6 5.2 1.2 0.8 0.9
House price inflation7 3.5 6.5 0.6 -1.3 0.4 1.6
Current account balance            
  $billion -9.1 -10.7 -10.2 -12.9 -15.1 -16.3
  % of GDP -4.5 -5.1 -4.6 -5.5 -6.2 -6.5
Net international investment position            
  % of GDP -71.9 -74.6 -75.0 -77.2 -80.3 -83.6
TWI9 72.5 73.0 72.8 70.6 67.3 63.2
90-day bank bill rate9 2.7 2.7 3.1 4.1 4.6 4.8
10-year bond rate9 4.0 3.6 3.6 4.5 5.0 5.2

Notes:

  1. Forecasts finalised 19 November
  2. Contribution to GDP growth
  3. Estimated as the percentage difference between actual real GDP and potential real GDP
  4. Percent of the labour force, March quarter, seasonally adjusted
  5. Percent of the working-age population, March quarter, seasonally adjusted
  6. Quarterly Employment Survey, average ordinary-time hourly earnings, annual percentage change
  7. Annual percentage change
  8. System of National Accounts (SNA) basis, annual average percentage change
  9. Average for the March quarter

Longer time series for these variables are provided on page 127.

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