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Half Year Economic and Fiscal Update 2013

Risks and Scenarios

Overview

  • This chapter outlines the general economic and fiscal risks associated with the major assumptions underpinning the main forecast. Risks associated with the main forecast of the Half Year Update are evenly balanced, with upside risks to the domestic outlook having increased relative to recent Economic and Fiscal Updates, while risks associated with a negative global shock remain.
  • Domestically, risks with potentially the largest impact on the New Zealand economy relate to the speed of the Canterbury rebuild and its interaction with the wider economy, the extent to which demand is boosted by population growth via higher net migration inflows and the degree of caution displayed by consumers.
  • Major advanced economies continue to undergo significant adjustments to reduce government debt, while the effects of monetary easing remain uncertain. Emerging economies are at risk from a rise in global interest rates once the US begins tapering its quantitative easing programme, which could have negative implications for New Zealand's economy through both financial channels and the terms of trade.
  • Two scenarios are presented that represent just two possible ways the New Zealand economy could deviate from the main forecast. Scenario one is based on a stronger domestically driven, cyclical pick-up in GDP growth, in part driven by higher external net migration. This scenario results in nominal GDP being $20.7 billion higher over the forecast period. In scenario two, a slowing of growth in emerging Asia negatively impacts New Zealand's terms of trade and lowers nominal GDP by $12.5 billion over the forecast period. If these economic risks or any significant deviations from the main forecast were to eventuate they would impact on the Government’s fiscal performance and position.
  • In addition to risks associated with the economy, the Crown is also subject to expenditure and balance sheet risks. In particular, volatility in market prices such as interest rates can have a significant impact on the Crown's fiscal position.

Introduction

The first part of this chapter outlines the key risks to the economic outlook. These risks mainly relate to the key judgements associated with the main forecast. In the second part of the chapter, two scenarios are presented that represent just two possible ways the New Zealand economy could deviate from the main forecast. The chapter then focuses on the established channels between the risks facing the economy and the Crown’s fiscal position.

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