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Half Year Economic and Fiscal Update 2016

Risks and Scenarios

Overview

  • Overall, risks to the economic outlook have increased since the 2016 Budget Update. Internationalrisks are largely skewed to the downside, while domestic risks are more balanced. This chapter first outlines these key risks to the economic outlook, then presents two alternative scenarios for the economy, assuming some combination of these risks are realised, and outlines their implications for the fiscal forecasts. The final part of the chapter focuses on general fiscal risks.
  • Internationally, the key risk to the New Zealand economy is slower trading partner growth that leads to lower export demand and prices. This risk could arise from a sharp slowing of growth in China, further deterioration of growth in the euro area and Japan, or as a consequence of Brexit. The timing and extent of the US economic recovery and monetary tightening cycle, and future trade and fiscal policy present a further source of uncertainty to these forecasts.
  • Risks to the domestic outlook are more balanced, and centre around net migration, residential investment and the extent of spare capacity in the economy, tourism growth, goods exports (particularly dairy), uncertainty around inflation and housing market dynamics, and the impact of the Kaikōura earthquakes.
  • Two scenarios are presented that show ways in which the New Zealand economy could deviate from the main forecast. Scenario One illustrates the impact of an international shock that lowers our trading partners' growth and increases global financial market volatility, prompting a fall in export demand, asset prices, the New Zealand dollar and the terms of trade, leading to lower investor and consumer confidence. In this scenario, nominal GDP, tax revenue and OBEGAL are lower.
  • Scenario Two shows the economic impact of tighter-than-expected capacity constraints. In this scenario, inflationary pressures are stronger as prices are bid up, while in the medium term investment and consumption growth is constrained to lower than in the main forecasts. This scenario lifts nominal GDP, tax revenue and OBEGAL.
  • The above risks have implications for economic activity and income, and therefore represent risks to the Crown's forecast revenue. The Crown is also subject to other risks affecting expenditure and the Crown's balance sheet. 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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