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Pre-election Economic and Fiscal Update 2017

Economic Outlook (continued)

…provides broad-based support for business investment

Growth in business investment has picked up over the past year or so and, as a share of GDP, it is close to historical highs (Figure 1.11). The outlook over the next few years is positive, consistent with surveyed intentions of business investment and the Government's announcements of capital expenditure including Canterbury and Kaikōura earthquake related work and other public infrastructure works (eg, Auckland City Rail Link). Rising international visitor numbers, continued low global and domestic interest rates, population growth and the prospect of a sustained improvement in export prices provide support for business investment.

Figure 1.11 - Business investment
Figure 1.11 - Business investment.
Sources: Statistics New Zealand, the Treasury

Improved external environment…

The outlook for growth in New Zealand's major trading partners is little changed from the Budget Update (Figure 1.12). The improvement in global conditions evident earlier this year has been maintained through the June quarter. Above-trend growth has contributed to declines in unemployment rates to historically low levels in some large economies, including the United States (US) and Japan. Above-trend growth is projected to continue in a number of advanced economies leading to further declines in unemployment and a pick up in wage and price inflation from current low rates.

Figure 1.12 - Trading partner growth 
Figure 1.12 - Trading partner growth.
Sources: Haver Analytics, the Treasury

The outlook for China is a little stronger than previously as the faster pace of growth in the first quarter has continued. Growth is expected to be only a little lower than last year, supported by increased spending on infrastructure and property construction. The possibility of policy change following the Chinese Communist Party's National Congress later this year is a source of uncertainty. Credit growth remains high and high levels of debt continue to pose a risk to the medium-term outlook. Growth is expected to slow modestly over the forecast horizon, from around 6.6% in 2017 to 5.8% in 2020, as the economy continues to rebalance towards more services-led growth. This rebalancing is expected to provide significant support for New Zealand's exports and the terms of trade. Growth in other Asian economies (excluding China and Japan) is being supported by the improved global outlook and by expansionary macroeconomic policies.

Growth in Australia has been variable in recent quarters, largely reflecting temporary factors, including weather-related disruptions to mining sector output. In recent months, employment growth has strengthened and the unemployment rate has decreased, although wage growth remains subdued. Household debt is high and growing faster than household incomes, raising medium-term risks to the growth outlook. Australia is expected to grow at a moderate pace, supported by low interest rates and higher export volumes, leading to a gradual decline in the unemployment rate.

The US has continued to grow at a moderate above-trend pace and, in the euro-area and Japan, growth momentum has strengthened further. Delays in reaching political agreement have increased uncertainty around the prospects of expansionary fiscal policy in the US, although we continue to project some fiscal stimulus in 2018. In the euro area, political uncertainty appears to have declined in recent months and business and consumer sentiment has improved. Euro area growth is projected to remain around trend over the forecast period leading to modest reductions in the unemployment rate. In the United Kingdom (UK), growth has weakened as the lower exchange rate has eroded consumer spending power. Economic growth is projected to slow as uncertainty around the implications of the UK's exit from the European Union undermines investment spending in particular. Household spending is also likely to remain subdued as the labour market weakens and real income growth slows.

Inflation remains below target in many advanced economies and core inflation has remained subdued (Figure 1.13). Monetary policy remains highly accommodative in advanced economies, although the risks of further easing have retreated. Monetary policy is expected to continue to support growth until economic slack is absorbed and inflation rises to its target, which is around 2019 or later in many economies. However, the outlook for monetary policy remains uncertain. If there is less spare capacity than assumed, or if growth is stronger than expected, inflation could rise more quickly than expected and monetary policy may be tighter. In these circumstances, the New Zealand dollar could depreciate, leading to some rebalancing of activity in New Zealand towards the external sector.

Figure 1.13 - Core inflation 
Figure 1.13 - Core inflation.
Source: Haver Analytics
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