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Pre-election Economic and Fiscal Update 2014

Risks and Scenarios

Overview

  • This chapter outlines the main economic and fiscal risks associated with the central forecast. Risks to the economic outlook are evenly balanced over the forecast period as a whole, while being tilted to the downside in the near-term. In addition to risks associated with the economy, the Crown is also exposed to expenditure and balance sheet risks. In particular, volatility in market prices can have a significant impact on the Crown’s fiscal position.
  • Internationally, the risks with potentially the largest impact on the New Zealand economy relate to the level of demand for New Zealand's commodity exports, particularly from China, as well as the timing and magnitude of interest rate increases in the US and the sensitivity of energy prices to geopolitical developments.
  • Domestically, the risks with potentially the largest impact on the New Zealand economy relate to the pace of the Canterbury rebuild and its interaction with the wider economy, the sensitivity of households to higher debt servicing costs, along with net migration’s impact on domestic demand.
  • Two scenarios are presented that represent two possible ways in which the New Zealand economy could deviate from the central forecast. Scenario one is based on weaker short-term domestic demand combined with a larger decline in the terms of trade, which lowers nominal GDP over the forecast period. Scenario two is based on stronger growth in the US, which leads to exchange rate depreciation and a more competitive export sector, increasing nominal GDP over the forecast period.
  • The first part of this chapter outlines the key risks to the economic outlook. The second part of the chapter presents the two alternative scenarios for the economy. The remainder of the chapter focuses on general fiscal risks that can impact the Crown's fiscal position.
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