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Half Year Economic and Fiscal Update 2014

Medium-term Outlook

The medium-term outlook for economic activity remains solid...

The outlook for real economic growth remains positive over the medium term. Annual average growth in real GDP in the year to March 2016 is forecast to be similar to the previous March year, at 3.4%, before easing to 2.2% in March 2019 (Figure 1.10). Relative to the Pre-election Update, growth over the medium term is forecast to be slightly higher, reflecting faster population growth from higher migration inflows and greater investment owing to lower interest rates.

Faster labour force growth and higher investment also contribute to a marginal upward revision to the economy's potential growth rate.[2] The annual average potential growth rate is estimated to increase from 2.4% in the June quarter 2014 to a peak of 2.9% in mid-2016 before easing to 2.3% by the end of the forecast period (Figure 1.10). The impact of even higher potential growth over the forecast period is described in scenario two of the Risks and Scenarios chapter.

Figure 1.10 - Actual and potential GDP growth
Figure 1.10 - Actual and potential GDP growth   .
Source:  Statistics New Zealand, the Treasury

Despite the slight lift in potential growth, above-trend rates of growth are forecast to result in inflation increasing to just above 2.0%, with interest rates forecast to rise to keep inflation pressures under control. Rising interest rates, combined with the fading stimulus from the Canterbury rebuild and high net migration, contribute to a moderation in GDP growth later in the forecast. A continuing high value of the NZ dollar and fiscal restraint also act as headwinds to growth over the forecast period. higher net migration boosts population growth...

Strength in the net inflow of external migrants is expected to continue and the annual gain is forecast to peak in March 2015 at 52,400, with the duration of the current cycle now assumed to be slightly longer than previously forecast (Figure 1.11). Departures are expected to increase again over 2015 as the Australian economy improves, while arrivals begin to ease from their record high levels. The change in the profile of migration results in an additional 23,400 people over the forecast period compared to the Pre-election Update. Higher net migration inflows continue to pose an upside risk to the outlook for aggregate activity.

Figure 1.11 - Annual net external migration
Figure 1.11 - Annual net external migration   .
Source:  Statistics New Zealand, the Treasury

...which supports real private consumption growth

The growing population supports real private consumption growth over the next few years, which is forecast to grow by around 3.5% annually over 2015 and 2016 before returning to around 2.0% over the remainder of the forecast period as interest rates increase. The outlook for private consumption is reinforced by ongoing growth in real labour incomes over the forecast period, supporting the purchasing power of households.

Residential investment remains a major driver of growth in the economy but will peak...

The level of residential investment is expected to continue increasing before easing towards the end of the forecast period with population growth and existing housing shortages in Auckland a major driver of activity. Housing investment in Christchurch remains well above the pre-quake average and the high level of activity is likely to be sustained for some time, although earthquake-related construction is expected to peak over the next year or so.

The assumptions concerning the rebuilding of Christchurch are unchanged from the Pre-election Update. The total amount of rebuild-related investment is estimated to be $40 billion (in 2011 prices), with just over half of this total assumed to take place by mid-2019. Most of this investment will be funded by insurance payments and government investment. The residential rebuild will account for the greatest share of reconstruction activity over the forecast period, followed by investment in infrastructure and social assets, and commercial assets.

...and business investment expands

Businesses are also expected to continue to expand their investment as aggregate demand in the economy increases and confidence and investment intentions remain elevated. Reduced spare capacity in the economy and lower interest rates are expected to lead firms to invest more. Annual average growth in business investment is forecast to remain elevated over the next three years at around 7.0% and then decline to 2.5% by the end of the forecast period. The level of investment is forecast to increase to nearly 25% of GDP, alongside national saving rising to around 19%.

Ongoing demand for workers is forecast to result in falling unemployment...

Demand for labour is expected to continue to grow with the expansion in the economy. Growth in the working-age population will continue to be boosted by higher net migration and the proportion of the working-age population participating in the labour market is forecast to stabilise at a high level. As a result, the unemployment rate is forecast to fall to around 4.5% by 2019 (Figure 1.12).

Figure 1.12 - Participation and unemployment
Figure 1.12 - Participation and unemployment   .
Source:  Statistics New Zealand, the Treasury

...leading to an increase in wage growth

As spare capacity in the labour market is further reduced, firms will increasingly bid up wages to attract workers. Ordinary-time hourly earnings are expected to rise by around 3.1% annually on average from 2015 onwards. Moderate employment growth, combined with rising wage growth, will increase total compensation of employees by more than 4% on an annual basis throughout most of the forecast period.

The Government will continue exercising spending restraint

Fiscal policy is forecast to exert a mild constraining influence on demand over the forecast period as a whole. Operating balances are forecast to increase through time but at a slower pace than forecast in the Pre-election Update over the next two years. Growth in government consumption increases from 2017 onwards as Budget operating allowances are increased. As outlined in the Fiscal Outlook chapter, operating allowances have been added to expenditure as a working assumption, but in practice are available for a combination of expenditure and revenue initiatives.


  • [2]Potential growth is the rate at which the economy can expand while maintaining stable inflation. It depends on how many people are available to work and how many hours they are willing to work (labour); the number of buildings, machines and computers (capital); and the efficiency with which they are used (productivity).
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