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Half Year Economic and Fiscal Update 2014

Economic Outlook

Overview

  • Economic activity expanded at a solid pace in the year to June 2014, growing 3.5%, and is expected to grow at a similar pace in the next two years underpinned by domestic demand. The key drivers are residential construction, business investment and population growth.
  • As the impulse from these factors fades, and monetary policy normalises in response to rising inflation, real GDP growth is expected to moderate over the latter half of the forecast period. Fiscal spending is expected to decline as a share of GDP and to restrain the rate of growth in domestic demand. The NZ dollar has declined only slightly from its peaks earlier in the year and will remain a constraint on export growth for the next couple of years, which is reflected in a sustained deterioration in the current account.
  • Economic growth amongst our main trading partners remains positive but uneven. The outlook has strengthened for the US and the UK, and activity in Australia is expected to pick up towards trend growth. The outlook for Japan and the euro area is weak, while growth in China and some other Asian economies is forecast to slow over the medium term. Forecasts for growth have been revised down slightly.
  • In contrast to the real GDP outlook for the New Zealand economy, lower-than-expected domestic inflation and weaker international commodity prices result in a materially weaker forecast for nominal GDP over the medium term.
  • Prices of dairy exports have continued to fall in the second half of the year but are expected to begin recovering in 2015. Consequently, the terms of trade are expected to decline further in the near term before recovering to above-average levels. Risks to this forecast are weighted towards weaker prices, and the impacts of this are outlined in scenario one of the Risks and Scenarios chapter.
  • The economy has more spare capacity than previously expected and inflationary pressures have been more subdued than anticipated, in part owing to faster-than-expected labour force growth. However, the forecast pace of expansion remains above our estimate of trend growth and spare capacity is expected to diminish. As it does so, there will be increasing pressure on prices to increase. Estimates of potential growth are inherently uncertain and the impacts of even higher potential growth are described in scenario two of the Risks and Scenarios chapter.
Table 1.1 - Economic forecasts1
(Annual average % change,
March years)
2014
Actual
2015
Forecast
2016
Forecast
2017
Forecast
2018
Forecast
2019
Forecast
Private consumption 3.3 3.6 3.4 3.1 1.7 1.6
Public consumption 1.7 1.6 -0.5 0.1 2.8 2.5
Total consumption 3.0 3.2 2.6 2.5 2.0 1.8
Residential investment 17.0 15.3 12.2 4.5 0.9 -2.6
Market investment 8.8 6.2 7.1 6.7 4.4 2.9
Non-market investment -2.6 -2.0 5.1 2.4 2.4 2.4
Total investment 10.6 8.2 8.4 6.5 3.9 2.0
Stock change2 0.3 0.5 -0.8 -0.1 -0.1 0.1
Gross national expenditure 4.7 4.9 3.3 3.4 2.4 1.9
Exports 0.3 0.5 1.8 3.5 3.1 2.5
Imports 8.0 5.9 1.7 5.0 3.2 1.7
GDP (expenditure measure) 2.5 3.3 3.4 2.8 2.3 2.1
GDP (production measure) 3.2 3.5 3.4 2.8 2.3 2.2
Real GDP per capita 2.2 1.9 1.8 1.7 1.3 1.3
Nominal GDP (expenditure measure) 6.7 3.0 4.9 5.7 4.1 3.6
GDP deflator 4.1 -0.2 1.5 2.8 1.8 1.5
Potential GDP 2.3 2.7 2.9 2.9 2.5 2.3
Output gap (% deviation, March quarter)3 -0.1 0.3 0.7 0.4 0.3 0.0
Employment 2.5 2.9 1.7 1.6 1.3 1.1
Unemployment rate4 6.0 5.4 5.1 4.7 4.5 4.5
Participation rate5 69.2 68.9 68.7 68.8 68.8 68.8
Nominal wages6 2.5 2.8 2.8 3.1 3.3 3.5
CPI inflation7 1.5 1.3 2.0 2.1 2.0 2.0
Terms of trade8 13.5 -3.9 -3.6 3.7 0.5 0.4
House prices9 8.0 5.4 3.9 2.5 2.3 2.0
Current account balance
  $billions -6.0 -12.4 -15.2 -14.8 -15.4 -16.4
  % of GDP -2.7 -5.3 -6.2 -5.8 -5.7 -5.9
Net international investment position
  % of GDP -67.0 -68.9 -71.9 -73.8 -76.6 -79.8
TWI10 78.7 76.5 76.5 76.6 75.6 73.6
90-day bank bill rate10 3.0 3.7 3.9 4.4 4.8 5.2
10-year bond rate10 4.6 4.0 4.2 4.7 5.0 5.1

Notes:

  1. Forecasts finalised 10 November 2014
  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. Quotable Value New Zealand (QVNZ) House Price Index, annual percentage change
  10. Average for the March quarter

Longer time series for these variables are provided on page 136.

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