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Half Year Economic and Fiscal Update 2013

Economic Outlook


The near-term outlook for the New Zealand economy is robust, with an increasingly embedded and broad-based pick-up in activity anticipated following a drought-affected first half of 2013. Real GDP growth is expected to exceed its potential rate over the coming years, peaking at 3.6% in the March 2015 year, before easing to a more moderate rate of around 2.0% towards the end of the forecast period.

Growth outlook reflects net influence of supportive and constraining factors

The growth outlook continues to reflect the net impact of a number of large supporting and constraining forces. The Canterbury rebuild remains a key factor on the supportive side, along with a high terms of trade, stimulatory monetary policy settings and rising incomes on the back of a strengthening labour market.

The supportive influences on the domestic economy are set against a backdrop of familiar constraining factors. These include the forecast reduction in the fiscal deficit, which will continue to lean against demand, an elevated exchange rate that will remain a near-term headwind for growth in the export sector, and a steady, but uneven, outlook for global economic growth.

The main influences on the outlook for the economy are broadly similar to those in the Budget Update. However, higher-than-expected net migration inflows over the year to date contribute to stronger near-term demand growth, and add to the supply potential of the economy further out.

Figure 1.1 - Real GDP growth
Figure 1.1 - Real GDP growth   .

Domestic demand pressures building in the near term...

The Canterbury rebuild is expected to provide significant impetus to demand over the forecast horizon and beyond, chiefly through additional residential and business investment, but also through related consumption spending on consumer durables.

The merchandise terms of trade are forecast to remain elevated and close to historic highs across most of the forecast period, supported by rising demand for New Zealand's commodity exports. This is a key driver of income growth and nominal GDP growth.

An additional inflow of approximately 26,000 net migrants compared to the Budget Update will boost the productive capacity of the economy over time, but will add to demand pressures in the near term - particularly in the housing market in Auckland.

Households are assumed to be broadly comfortable with the amount of debt reduction undertaken over recent years (as a share of income). That said, households are expected to remain cautious in their spending decisions, with increases in consumption coming from rises in income, rather than from running down assets or increasing debt.

...against a backdrop of familiar offsetting factors

Ongoing steps to reduce the fiscal deficit will remain a constraining factor on demand over the coming years, but will free up resources enabling additional activity elsewhere, such as the Canterbury rebuild. The reduction in the deficit will also allow interest rates and the exchange rate to remain lower than they would otherwise be.

The elevated New Zealand dollar will constrain activity in exchange rate-sensitive parts of the economy over the coming years, including the non-commodity and service export sectors, but will also support investment and consumption by making imported goods cheaper. The assumed decline in the exchange rate is expected to begin to stimulate activity in the external sector towards the end of the forecast period.

The near-term outlook for trading partner growth is slightly weaker than forecast in the Budget Update, primarily owing to slower growth in the Australian economy as mining investment moderates. Although the medium-term outlook for this growth is relatively benign, there are risks arising from the diverging trends in the global economy.

Interest rates expected to begin to rise next year

With the economy set for a period of above-potential growth, increasing price pressures are expected to see the Reserve Bank begin to increase the Official Cash Rate (OCR) in the first half of 2014. The forecast track for short-term interest rates in the Half Year Update is broadly similar to that in the Budget Update, but is around 30 basis points lower than it would have been in the first half of the forecast period if loan-to-value (LVR) lending restrictions had not been implemented.

Having been the subject of a range of revisions since the Budget Update, the annual current account deficit is expected to narrow further in the near term, before widening to 6.4% of GDP in the March 2018 quarter.

Table 1.1 - Economic forecasts1
(Annual average % change,
March years)
Private consumption 2.3 3.7 2.8 2.8 1.9 1.6
Public consumption 0.4 0.1 0.4 0.7 0.6 0.7
Total consumption 1.9 2.9 2.3 2.4 1.6 1.4
Residential investment 19.1 16.7 25.5 16.4 3.7 0.6
Market investment 6.2 11.7 8.1 3.1 0.7 1.0
Non-market investment -12.2 15.2 -3.7 2.4 2.4 2.4
Total investment 7.1 14.6 12.1 6.2 1.7 1.1
Stock change2 -0.4 0.2 -0.2 -0.1 0.0 0.1
Gross national expenditure 2.3 5.7 4.4 3.3 1.6 1.3
Exports 3.0 -2.2 2.4 1.9 2.9 3.0
Imports 0.7 7.3 5.1 4.3 2.1 0.8
GDP (expenditure measure) 2.9 2.4 3.4 2.5 2.0 2.2
GDP (production measure) 2.7 2.7 3.6 2.7 2.0 2.2
Real GDP per capita 2.0 1.6 2.2 1.6 1.0 1.2
Nominal GDP (expenditure measure) 2.4 6.5 4.9 5.2 4.0 3.7
GDP deflator -0.5 3.9 1.5 2.6 2.0 1.5
Output gap (% deviation, March quarter)3 -0.9 -0.2 0.9 0.5 0.0 0.0
Employment 0.3 2.0 2.6 1.4 1.0 1.3
Unemployment rate4 6.2 5.8 5.6 5.4 5.2 4.7
Participation rate5 67.9 68.5 68.9 68.7 68.5 68.5
Nominal wages6 2.1 2.7 3.1 3.2 3.4 3.4
CPI inflation7 0.9 1.4 2.4 2.4 2.3 2.2
Terms of trade8 -6.1 10.6 -0.9 1.6 0.3 0.0
Current account balance            
  $billion -9.5 -9.5 -13.0 -15.7 -16.7 -17.2
  % of GDP -4.5 -4.2 -5.5 -6.3 -6.5 -6.4
Net international investment position
% of GDP
-71.8 -70.6 -72.8 -75.5 -79.0 -82.6
TWI9 75.9 77.0 75.3 73.9 70.0 65.3
90-day bank bill rate9 2.7 2.7 3.6 4.4 4.9 5.2
10-year bond rate9 3.7 4.8 4.9 5.1 5.2 5.2


  1. Forecasts finalised 11 November 2013.
  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) and merchandise basis, annual average percentage change.
  9. Average for the March quarter.

Longer time series for these variables are provided on page 129.

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