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Half Year Economic and Fiscal Update 2016

Economic Outlook

Overview

  • Growth in the New Zealand economy over the first half of 2016 was stronger than expected in the Budget Update as high net migration inflows, elevated tourist arrivals and low interest rates supported residential construction, services exports, market investment and private consumption. Annual average real gross domestic product (GDP) growth is forecast to accelerate from 2.8% in June 2016 to a peak of 3.6% in 2017 as these factors persist.
  • Over the medium term, real GDP growth moderates to 2.3% by 2021 as space capacity is exhausted and interest rates rise. Growth in the labour supply slows as net migration inflows subside, leading to higher wage and price pressures.
  • Trading partner growth eased in the first half of 2016 largely reflecting slower growth in the US. The outlook for trading partner growth is weaker than in the Budget Update, as a result of the impact of Brexit and lower long-term growth in the US.
  • The recovery in global dairy prices over the second half of 2016 is expected to lead to a higher terms of trade in the near term. Over the medium term, ongoing moderation in global milk production helps drive a gradual rise in dairy prices. Weak global inflation keeps import prices muted, supporting the terms of trade.
  • Nominal GDP growth is expected to pick up in the near term, supported by solid real GDP growth and the terms of trade. Over the forecast period, nominal GDP growth averages 4.8% per year and is cumulatively $23.7 billion higher than in the Budget Update in the four years to June 2020, reflecting a higher starting point (first half of 2016) and a stronger near-term outlook for prices and real activity.
  • The outlook is subject to a range of risks and uncertainties. As outlined in the Risks and Scenarios chapter, global risks are skewed to the downside while domestic risks are more balanced.
  • The 7.8 magnitude earthquake that struck the Kaikōura region on 14 November occurred after the economic forecasts were finalised - see Economic and fiscal impacts of the Kaikōura earthquakes on page 6 for discussion of the economic and fiscal impacts.
Table 1.1 - Economic forecasts (June years)1
(Annual average % change, June years) 2016
Actual
2017
Forecast
2018
Forecast
2019
Forecast
2020
Forecast
2021
Forecast
Private consumption 2.7 4.0 3.7 3.3 2.8 2.2
Public consumption 1.7 2.6 1.5 1.0 1.1 1.0
Total consumption 2.4 3.7 3.2 2.7 2.4 1.9
Residential investment 8.2 14.3 7.8 2.1 -1.7 -0.2
Market investment 0.6 9.3 6.7 6.2 3.9 2.3
Non-market investment 12.8 2.1 3.4 -4.9 0.2 2.4
Total investment 3.1 10.0 6.8 4.3 2.1 1.6
Stock change2 -0.4 -0.2 0.3 0.2 0.2 0.1
Gross national expenditure 2.3 5.1 4.4 3.3 2.5 1.9
Exports 5.1 1.4 1.9 3.0 2.7 3.2
Imports 1.2 5.7 5.0 4.0 2.8 1.9
GDP (expenditure measure) 3.3 3.7 3.5 3.0 2.4 2.3
GDP (production measure) 2.8 3.6 3.5 2.9 2.4 2.3
Real GDP per capita 0.7 1.5 1.7 1.5 1.2 1.1
Nominal GDP (expenditure measure) 4.2 5.2 5.6 5.0 4.1 3.9
GDP deflator 0.9 1.4 2.0 2.0 1.7 1.6
Potential GDP 3.1 3.1 2.8 2.7 2.6 2.5
Output gap (% deviation, June quarter)3 -0.9 -0.4 0.4 0.4 0.1 0.0
Employment 2.3 4.8 1.6 1.5 1.1 0.9
Unemployment rate4 5.0 4.8 4.6 4.2 4.3 4.3
Participation rate5 69.7 69.9 69.6 69.4 69.2 69.0
Nominal wages6 2.1 1.6 2.2 2.8 3.1 3.0
CPI inflation7 0.4 1.5 2.0 2.1 2.0 2.1
Terms of trade8 -2.4 1.8 1.7 1.0 0.4 0.3
House prices9 13.5 9.3 6.1 3.8 3.1 2.0
Current account balance            
  $billions -7.3 -8.1 -10.7 -12.1 -13.5 -13.9
  % of GDP -2.9 -3.0 -3.8 -4.1 -4.4 -4.4
Net International Investment Position
(% of GDP)
-64.9 -64.7 -65.2 -66.2 -68.0 -69.8
Household saving ratio (% of HHDI)10 0.5 2.2 1.6 0.8 0.3 -0.1
TWI11 73.6 76.5 74.9 75.0 74.5 72.6
90-day bank bill rate11 2.4 1.9 1.9 2.3 3.2 3.9
10-year bond rate11 2.7 2.9 3.3 3.9 4.2 4.3

Economic forecasts are presented on a June year basis for consistency with the fiscal forecasts. Longer time series for these variables are provided on page 142.

Notes:

  • Forecasts finalised 10 November 2016.
  • Contribution to GDP growth.
  • Estimated as the percentage difference between actual real GDP and potential real GDP.
  • Percent of the labour force, June quarter, seasonally adjusted.
  • Percent of the working-age population, June quarter, seasonally adjusted.
  • Quarterly Employment Survey, average ordinary-time hourly earnings, annual percentage change.
  • Annual percentage change.
  • System of National Accounts (SNA) and merchandise basis.
  • Quotable Value New Zealand (QVNZ) House Price Index, annual percentage change.
  • Percent of household disposable income (HHDI), March years.
  • Average for the June quarter.
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