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Half Year Economic and Fiscal Update 2012

Domestic Outlook

New Zealand economy continues to recover...

The soft patch in domestic activity in the September 2012 quarter, combined with a weaker international outlook and a stronger New Zealand dollar (NZD), has led us to reduce forecast real GDP growth to 2.3% and 2.9% in the years ending March 2013 and March 2014 respectively (from 2.6% and 3.4% in the Budget Update forecasts). Growth across the later years of the forecast period averages 2.4% per year - down from 3.0% in the Budget Update forecasts, reflecting the Treasury's changed assessment of potential growth. (See ‘GDP Growth in the Half Year Update' box for further details.)

Figure 1.5 - Composition of GDP growth
Figure 1.5 - Composition of GDP growth.
Sources:  Statistics New Zealand, the Treasury

Investment relating to the Canterbury rebuild remains a strong driver of GDP growth across most of the forecast period. Total consumption also makes a solid contribution to growth across the forecast horizon, although growth in household consumption spending is constrained by ongoing consumer deleveraging, elevated unemployment, and subdued house price growth. Export volumes make only a modest contribution to growth over the next two years as the bumper agricultural conditions of recent years return to normal, international conditions remain weak, and an elevated exchange rate deters tourists. A pick-up in imports, in part relating to the Canterbury rebuild, means that net exports detract from real GDP growth until 2016. Thereafter, net exports begin to make a positive contribution to growth as the international outlook improves and growth in Canterbury rebuild activity slows.

GDP Growth in the Half Year Update

The Treasury's main forecast shows the economic recovery in New Zealand gathering momentum over the coming year, with accelerating GDP growth, falling unemployment and inflation returning to the centre of the Reserve Bank's target range. However, the economy is expected to grow more slowly over the forecast period than was expected at the time of the Budget Update.

In forming a view about the likely growth of the New Zealand economy, the Treasury must make a judgement about its underlying supply capacity. This is informed by an assessment of trends in the growth of the working-age population, the share of those willing and able to work and the productivity with which they do so. Together, these judgements provide an anchor for the forecast of GDP in the medium term.

This assessment is complemented by an examination of the margin of spare capacity in the economy and, therefore, the scope for the economy to grow faster than its underlying rate as those resources are put to use. This depends on the number of unemployed and the amount of equipment sitting idle, awaiting a pick-up in demand.

In the 2009 Budget Update, the Treasury took account of the impact of the global financial crisis by revising down its forecasts of GDP growth. Since then, the economic recovery in a number of advanced economies has disappointed, leading other forecasting institutions such as the International Monetary Fund (IMF), the Organisation for Economic Co-operation and Development (OECD), and the Reserve Bank of New Zealand (RBNZ) to further revise down their growth forecasts.

Figure 1.6 - The level of real GDP
Figure 1.6 - The level of real GDP.
Sources:  The Treasury, Consensus Economics

Economic growth in the Half Year Update is forecast to be around 0.5% points lower, per year, than was expected in the 2012 Budget Update. This largely reflects a judgement that, while there is now slightly more spare capacity in the economy than was expected, owing to rising unemployment, the underlying growth rate of the New Zealand economy will be slower for longer. That is to say that the weaker growth over the forecast period is not expected to be offset by stronger growth in later years and, as a result, the level of GDP at the end of the forecast period will be around 2% lower than was anticipated in the Budget Update (after taking into account revisions to the GDP data).

Our updated assessment of the economy's growth prospects leaves our forecasts broadly consistent with those of other forecasters, following a downward revision to the average of those forecasts since the time of the Budget Update (Figure 1.6). Following a detailed assessment of the New Zealand economy's supply capacity, the risks to the main forecast are considered to be broadly balanced, albeit skewed to the downside. More information on this assessment can be found in the supplementary note ‘Potential Output in the Half Year Update' published online with this Half Year Update document. Alternative economic scenarios which explore the sensitivities of the forecast to illustrative upside and downside scenarios are presented in the Risks and Scenarios chapter.

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