The Treasury

Global Navigation

Personal tools

Treasury
Publication

Pre-election Economic and Fiscal Update 2017

1 Economic Outlook

Overview

  • The New Zealand economy grew an estimated 2.8% in the 2016/17 fiscal year, a little lower than anticipated in the Budget Economic and Fiscal Update (Budget Update). Measured in current prices, the economy is estimated to have grown 6.2% in 2016/17, unchanged from the Budget Update.
  • Growth is forecast to pick up to 3.7% in 2018/19 before easing to 2.3% in 2020/21. The outlook is underpinned by ongoing strength in population growth, the continued cyclical upturn in the international economy, the stimulus provided by Budget 2017 and supportive monetary policy.
  • The pick-up in growth over the next two years or so is expected to lead to a gradual decline in the unemployment rate and a faster pace of increase in wages and prices. Headline inflation is expected to be variable this year and to increase gradually thereafter, rising to 2.1% in 2019/20. Net immigration is assumed to ease over the forecast period, although there is considerable uncertainty around its path. Beyond 2018/19, slower population growth and reduced monetary policy stimulus lead to slower economic growth.
  • Residential investment declined in the March 2017 quarter, likely reflecting the impacts of higher mortgage rates, tighter bank lending standards and higher construction costs. Looking forward, strong population growth and still-low interest rates suggest that residential investment will pick up, although growth may be slower than previously forecast. Reflecting these developments, the outlook for economic growth is a little lower than in the Budget Update.
  • Recent gains in the terms of trade lead to a modest upward revision to current price estimates of economic growth in 2017/18. Thereafter, nominal GDP growth is forecast to be a bit lower than in the Budget Update. Cumulatively, over the four years to 2020/21, nominal GDP is 0.2% ($2.6 billion) lower than in the Budget Update.
  • As usual, the outlook is subject to a range of risks and uncertainties. The terms of trade may be stronger if prices for key export commodities hold up for longer than expected, providing a boost to national income. Growth in domestic demand may be lower than expected if households' expectations of future income or wealth are dampened by continuing slow wage growth or a weaker outlook for house price growth.
Table 1.1 - Economic forecasts
(Annual average % change, June years)  2016
Actual
2017
Estimated
2018
Forecast
2019
Forecast
2020
Forecast
2021
Forecast
Private consumption 3.2 4.6 3.8 3.7 2.5 2.0
Public consumption 1.9 3.2 1.8 1.4 1.4 1.1
Total consumption 2.8 4.2 3.4 3.2 2.3 1.8
Residential investment 6.3 6.1 -0.1 4.5 3.0 3.9
Business investment1 2.6 5.3 7.6 5.3 6.2 5.2
Total investment 3.6 5.5 5.6 5.1 5.4 4.9
Stock change2 -0.4 0.4 -0.6 0.4 0.4 0.1
Gross national expenditure 2.6 4.8 4.0 4.1 3.4 2.7
Exports 5.1 -0.6 4.0 2.5 2.3 2.2
Imports 1.0 6.7 4.1 3.8 4.4 3.6
GDP (expenditure measure) 3.6 2.7 3.4 3.7 2.7 2.2
GDP (production measure) 2.7 2.8 3.2 3.7 2.8 2.3
Real GDP per capita 0.7 0.6 1.0 1.7 1.2 1.0
Nominal GDP (expenditure measure) 4.1 6.2 5.1 4.9 4.7 4.1
GDP deflator 0.5 3.4 1.7 1.2 1.9 1.8
Potential GDP 2.7 2.9 3.0 3.1 2.8 2.5
Output gap (% of potential, June quarter)3 -0.3 -0.4 0.0 0.4 0.2 0.0
Working-age population 2.4 2.6 2.4 2.1 1.7 1.4
Employment 2.3 5.4 2.7 2.1 1.5 1.1
Unemployment rate4 5.0 4.9 4.7 4.4 4.3 4.3
Nominal wages5 2.1 1.5 2.6 2.8 2.7 2.6
CPI inflation6 0.4 1.7 1.3 1.9 2.1 2.1
Terms of trade7 -2.7 6.7 3.2 -1.9 0.1 -0.1
House prices8 13.9 3.8 2.2 3.4 3.0 2.2
Current account balance            
  $billions -7.3 -8.3 -6.3 -8.2 -10.4 -12.6
  % of GDP -2.9 -3.1 -2.2 -2.8 -3.3 -3.9
Net International Investment Position (% of GDP) -64.4 -58.3 -57.6 -57.7 -58.5 -60.0
Household saving ratio (% of HHDI)9 -2.2 -0.7 -1.0 0.4 0.4 0.6
TWI10 73.6 76.5 78.1 78.5 78.7 78.0
90-day bank bill rate10 2.4 2.0 2.0 2.6 3.3 3.8
10-year bond rate10 2.7 2.9 3.0 3.5 4.0 4.2

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:

  1. Business investment is the total of all investment types excluding residential building. Previous separations of market and non-market investment are no longer produced by Statistics New Zealand.
  2. Contribution to GDP growth.
  3. Estimated as the percentage difference between actual real GDP and potential real GDP.
  4. Percent of the labour force, June quarter, seasonally adjusted.
  5. Quarterly Employment Survey, average ordinary-time hourly earnings, annual percentage change.
  6. Annual percentage change.
  7. System of National Accounts (SNA) and merchandise basis.
  8. Quotable Value New Zealand (QVNZ) House Price Index, annual percentage change.
  9. Percent of household disposable income (HHDI), March years.
  10. Average for the June quarter.

Key economic forecast judgements and assumptions

  • These forecasts cover the period June quarter 2017 to June quarter 2021.
  • International prices for dairy exports are projected to fall slightly over the year ahead and to remain broadly stable thereafter.
  • West Texas Intermediate (WTI) oil prices rise from US$48.1 per barrel in the June 2017 quarter to US$60.0 in the June 2021 quarter.
  • Net permanent and long-term immigration declines from 72,540 persons in the year ended September 2017 to 20,000 persons in the year ended June 2021 and, consistent with Statistics New Zealand's long-run migration assumption, to 15,000 in the year ended June 2022 (outside the forecast period).
  • Working-age population (15 years of age and over) growth averages 1.9% per year over the forecast period, including the contribution of net migration.
  • The labour force participation rate declines from 70.6% in the March quarter 2017 to 69.8% in June 2021.
  • Economy-wide multifactor productivity growth averages 0.5% per year over the forecast period.
  • Economy-wide labour productivity growth averages 1.0% per year over the forecast period.
  • Potential output growth averages 2.9% per year over the forecast period.
  • The neutral nominal 90-day interest rate is 4.5% in June 2021.
  • The non-accelerating inflation rate of unemployment (NAIRU) is 4.25% in June 2021.
  • Tobacco excise tax increases in the March quarter for each of the next three years and contributes 0.2 percentage points to annual Consumers Price Index (CPI) inflation.
  • The Family Incomes Package announced by the Government in Budget 2017 is implemented on 1 April 2018. Households are assumed to spend 60% of the additional income. Overall, the Family Incomes Package increases nominal GDP by $3.0 billion over the period ended June 2021.
Page top