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Half Year Economic and Fiscal Update 2015

Risks and Scenarios


  • This chapter outlines the main economic and fiscal risks associated with the central forecast. The first part of the chapter outlines the key risks to the economic outlook. The second part of the chapter presents two alternative scenarios for the economy, and the remainder focuses on general fiscal risks. At present, risks to the global economy are skewed to the downside, while domestic risks are more balanced.
  • Internationally, the risks with potentially the largest impact on the New Zealand economy relate to the demand for commodities and global inflation. These include a sharp slowing of growth in China and its impact on other emerging market economies, the impact of the unwinding of easy US monetary policy on emerging economies and persistent weak inflation in many advanced economies. Recent volatility in dairy prices has increased the uncertainty about their future direction.
  • Domestically, the risks with potentially the largest impact on the New Zealand economy relate to the impact on agriculture from El Niño, whether inflation dynamics have changed, the demand response to monetary policy, uncertainty around productivity growth, the length and peak of the current migration cycle and house price growth.
  • Two scenarios are presented that show possible ways in which the New Zealand economy could deviate from the central forecast. Scenario One is based on slower potential growth, demand less responsive to monetary policy and a longer period before historical inflation relationships re-assert themselves. In this scenario, nominal GDP, tax revenue and OBEGAL would be lower. Scenario Two is based on higher dairy prices, increased tourism and a longer period of elevated net migration. This scenario lifts nominal GDP, tax revenue and OBEGAL over the forecast period.
  • In addition to the risks associated with the economy, the Crown is also subject to expenditure and balance sheet risks. In particular, volatility in financial asset prices and interest rates can have a significant impact on the Crown's fiscal position.
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