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Half Year Economic and Fiscal Update 2013

Economic Outlook - (continued) well as market investment

The current environment of low interest rates, strong business confidence and an elevated exchange rate (which makes imported capital goods cheaper) is also expected to drive a sharp increase in market investment in the near term. The Canterbury rebuild is expected to contribute to an increase in market investment as well. Later in the forecast period, higher interest rates and a lower exchange rate are expected to see market investment growth moderate.

Robust outlook for private consumption...

The large increase in residential investment over the forecast period is also expected to provide significant impetus to private consumption in the form of related and additional spending on consumer durables. Private consumption growth is expected to accelerate to 3.7% in the March 2014 year – its fastest pace since the end of 2007 – as consumer confidence remains elevated and real incomes are boosted by the current subdued inflation environment.

The pace of private consumption growth is expected to slow later in the forecast period as real income and house price growth slow, and interest rates rise (Figure 1.3).

Figure 1.3- Private consumption and house prices
Figure 1.3- Private consumption and house prices   .
Source:  Statistics New Zealand, QV, the Treasury

Migration and Regional Activity

One of the main differences between the Half Year Update and the Budget Update forecasts is the more pronounced turnaround in net permanent and long-term migration flows. After registering a net outflow of migrants throughout 2012, the annual net flow of migrants moved into positive territory in January 2013, and has since climbed to a three-year high of 17,500 in the year ended October 2013.

Net migration flows often exhibit large cycles as arrivals and departures move in different directions at the same time. In a reflection of the recent divergence in performance between the New Zealand and Australian economies, fewer migrant departures, mostly to Australia, account for around two-thirds of the turnaround in net migration flows since the start of 2013. Moreover, just over half of the increase in arrivals since the start of the year was accounted for by arrivals from Australia, two-thirds of whom were returning New Zealanders. All told, the Half Year Update incorporates an additional net inflow of around 26,000 migrants over the forecast period compared with the Budget Update, mainly in the next two years (Figure 1.4).

Figure 1.4 - Net migration
Figure 1.4  - Net migration   .
Source:  Statistics New Zealand, the Treasury

Additional migrants will add to the economy's supply potential over time...

Additional people in New Zealand will flow through to an increase in the labour force, and add to the underlying productive capacity of the economy. An additional inflow of migrants may also help to relieve regional pressures and bottlenecks in the labour market - particularly arising out of the ongoing Canterbury rebuild.

...but will add to demand pressures in the near term

However, it will take time for the full supply impetus to be felt and, in the meantime, higher net migration inflows will exacerbate near-term demand pressures. With the economy already operating close to capacity, any additional demand impetus will complicate the task for the Reserve Bank of setting monetary policy in the near term.

Moreover, the concentrated nature of the demand associated with higher net migration will also contribute to sustained upward pressure on house prices, particularly in the Auckland region. While aggregate annual house price growth in the Half Year Update is forecast to peak at a slower pace than in the previous housing cycle in the early-to-mid-2000s, the aggregate picture masks significant variation at a regional level.

Overall, to the extent that stronger near-term demand pressures elicit a more aggressive tightening of monetary policy, the wider risk is of a more pronounced economic cycle than in the central forecast. The Risks and Scenarioschapter contains an alternative scenario in which the net migration inflow is greater than in the Half Year Update's main forecast.

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