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Half Year Economic and Fiscal Update 2012

Risks and Scenarios

Overview

  • The first part of this chapter outlines the key risks to the economic outlook. In the second part of the chapter we present upside and downside scenarios for the New Zealand economy. The chapter then focuses on the established channels between the risks facing the economy and the Crown’s fiscal position.

Economic risks

  • The global economic outlook remains uncertain and poses risks to the New Zealand economy. While the initial short-term challenges in Europe have been partly addressed, ongoing medium-term challenges for the global economy remain.
  • The uncertainties around the pace of growth in the domestic economy lie mainly with the timing and scale of the Canterbury earthquake rebuild, but also around the degree of household consolidation and changes in the exchange rate.
  • Two scenarios illustrate the risks to the Treasury's main forecasts. A generalised upside scenario shows the effect of a number of factors leading to a faster-than-expected recovery on the New Zealand economy. A downside scenario looks at the effect on the New Zealand economy of lower world and domestic potential growth, as well as greater cyclical weakness in the near term.
  • We note that the two scenarios discussed in this chapter are only examples of other possible outcomes and are not indicative of relative likelihood of occurrence. There are a large number of risks - both to the upside and downside - to the outlook, and each would have its own unique effect on the economy if it were to occur. However, the ways they impact on the New Zealand economy are similar, thus the scenarios remain a useful tool in analysing different possible outcomes.

Fiscal risks

  • The balance of these risks also means that the achievement of the Government's fiscal strategy will remain challenging, as illustrated by the scenarios presented in this chapter. In the downside scenario, nominal GDP is $26 billion lower than in the main forecasts, compared to $16 billion higher in the upside scenario. Also, the operating balance remains in deficit over the forecast period in the downside scenario. While the operating surplus in the upside scenario is larger than in the main forecasts, a surplus is achieved in the same year. However, it should be noted that to the extent economic conditions and tax revenue differ from forecast, the Government could make policy changes in future budgets.
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