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Pre-election Economic and Fiscal Update 2014

Economic Outlook

Overview

  • The outlook for the New Zealand economy has not changed significantly in the relatively short time since the Budget Update. Growth in real GDP in the year to March 2014 was slightly faster than expected in the Budget Update, but the outlook for the year ahead is slightly weaker. Thereafter, the outlook for growth in real GDP is largely unchanged.
  • Growth in nominal GDP was also marginally higher in the past year than expected in the Budget Update, largely because of higher terms of trade, but is now forecast to be weaker over most of the forecast period as the terms of trade are expected to fall sooner and domestic prices have increased by less than previously expected. For an explanation of real and nominal GDP, see the box Real and Nominal GDP on page 7.
  • Economic growth amongst our main trading partners in the first quarter of 2014 was close to forecast at the aggregate level and the outlook remains similar to previously. Risks remain in the outlook for the world economy, especially geopolitical risks, and they are discussed further in the Risks and Scenarios chapter.
  • Dairy export prices are forecast to fall earlier than in the Budget Update, but to stabilise at around the same level later in 2014. If sustained, the latest auction prices would point to the risk of a larger fall in dairy prices and the terms of trade. A scenario based partly on lower terms of trade is discussed in the Risks and Scenarios chapter.
  • The main factors supporting growth in the New Zealand economy over the forecast period are the same as in the Budget Update, in particular the surge in residential construction in Christchurch and Auckland, faster population growth as a result of higher net migration inflows, and historically high terms of trade despite a near-term adjustment.
  • The factors that are expected to moderate growth in the economy include rising interest rates, the continuing high value of the New Zealand dollar and fiscal restraint.
  • The capacity of the New Zealand economy to grow is marginally increased by faster population growth, but pressure on resources is expected to increase as the pace of expansion exceeds the economy's potential rate of growth, and this pressure will manifest itself in higher inflation.
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