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Half Year Economic and Fiscal Update 2015

Executive Summary


  • New Zealand's economic growth slowed in the first half of 2015 relative to the Budget Update, reflecting weaker international economic conditions, falls in dairy prices and a softening of domestic demand. The forecasts in this Half Year Update show relatively muted growth persisting and the unemployment rate rising until early 2016. However, the economy is expected to recover over the medium term.
  • Following growth of 3.2% over the year to March 2015, annual average growth in real gross domestic product (GDP) is forecast to slow to 2.1% in the year to March 2016 owing to weak global and domestic demand and lower terms of trade. Stimulatory monetary conditions and a recovery in the terms of trade are expected to see annual average growth increase to 3.6% in March 2018 before moderating to 2.2% in March 2020. Relative to the Budget Update, real growth forecasts are weaker in the near term but stronger in the medium term (Figure 1). Nominal GDP (which incorporates price changes as well as output growth) is forecast to continue growing slowly over the next year and, despite a strong recovery in later years, does not return to the forecast levels in the Budget Update.
Figure 1 - Real GDP growth
Figure 1 - Real GDP growth.
Source: Statistics New Zealand, the Treasury
  • The operating balance before gains and losses (OBEGAL) returned to surplus in the 2014/15 fiscal year. The current year's results to 31 October continue to be above the forecast in the Budget Update. Looking ahead, the fiscal position is expected to be broadly balanced in 2015/16 and 2016/17, followed by rising surpluses over the remaining forecast horizon. This fiscal outlook is slightly weaker than in the Budget Update primarily as a result of lower tax revenues, which reflect the weaker economic outlook. The Government's fiscal stance is expected to be expansionary in 2015/16 before turning slightly contractionary over the remainder of the forecast horizon.
  • Significant judgements influencing the economic forecasts and, in turn, fiscal forecasts relate to trading partner growth, the future paths of dairy and oil prices, the impact of El Niño, the extent and duration of the current migration boom, and the amount of spare capacity in the economy and its relationship with Consumers Price Index (CPI) inflation.
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