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Economic Outlook

This section discusses the outlook for the economy over the next four years.

The forecasts for the domestic outlook are conditioned on a number of judgements and assumptions (see box on page 7). The TWI exchange rate is assumed to remain around its current level (78.1), which is slightly higher than in the Budget Update, for most of the forecast period. Growth in potential output is assumed to average 2.9% over the forecast period, slightly lower than in the Budget Update, reflecting downward revisions to past growth and growing evidence of capacity constraints in the economy. Lower growth in potential output is reflected in lower average labour productivity growth over the forecasts.

As in the Budget Update, we assume the 12-month total net migration inflow remains over 70,000 for the remainder of 2017 and thereafter declines steadily to 20,000 in the June quarter 2021. Growth in the working-age population slows from 2.5% in 2016/17 to 2.1% in 2018/19 and to 1.4% in 2020/21.

Positive growth outlook…

The pace of economic growth is expected to increase over the next two years or so and to absorb remaining spare capacity in the economy (Figure 1.8). The outlook is underpinned by strong population growth, the cyclical upturn in the international economy, the stimulus provided in Budget 2017 and supportive monetary policy.

Figure 1.8 - Economic growth (production GDP)
Figure 1.8 - Economic growth (production GDP).
Sources: Statistics New Zealand, the Treasury

Compared to the Budget Update growth is slightly weaker over the next two years, mostly because there appears to be less spare capacity in the economy than previously thought. The higher exchange rate is also contributing to a slower pick up in growth and inflation than might otherwise occur.

Growth in the 2017/18 year is forecast to pick up to 3.2% as exports rebound from a period of weakness. Growth in 2017/18 is forecast to be slightly lower than in the Budget Update, reflecting recent data, including housing market activity and house prices, that suggests there is a bit less momentum in residential investment and private consumption expenditure than previously thought. Nonetheless, private consumption growth is expected to remain solid.

Economic growth accelerates to 3.7% in 2018/19, well above potential growth, as ongoing employment growth supports household income growth and, therefore, consumer spending (Figure 1.9). Household income and consumption gets a further boost from the introduction of the Family Incomes Package on 1 April 2018, which reduces income tax and increases government transfers to households. Household saving also gets a boost, reflecting our assumption that 60% of the increase in income is spent. The assumptions around household behaviour are based on past experience, but the way households respond to an increase in income may be affected by a range of factors, including expectations around future income and wealth, that are difficult to predict.

Figure 1.9 - Private consumption and household income growth
Figure 1.9 - Private consumption and household income growth.
Sources: Statistics New Zealand, the Treasury

Private consumption growth slows over 2019/20 and 2020/21 as rising interest rates and slower employment growth lead to slower growth in disposable income.

The forecast for public consumption expenditure is little changed from the Budget Update. Growth slows over the years ahead, consistent with announcements in Budget 2017. The Treasury's fiscal impulse measure, which captures the impact of fiscal policy changes on the economy, including the Family Incomes Package and capital spending, shows fiscal policy is expected to contribute around one percentage point to economic growth in 2018/19 and a bit less the following year. The decline in government operating expenses as a share of GDP results in negative impulses from 2019/20.[2]

Residential investment activity is expected to continue to contribute to growth over the forecast period given the strength of population growth and support from low interest rates. However, should tighter financial conditions and higher construction costs persist, the pace of growth in activity is likely to be lower than previously forecast (Figure 1.10).

Figure 1.10 - Residential investment
Figure 1.10 - Residential investment.
Sources: Statistics New Zealand, the Treasury


  • [2]See the box entitled Summary fiscal indicators in the Fiscal Outlook chapter for additional detail.
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