The Treasury

Global Navigation

Personal tools

Treasury
Publication

Pre-election Economic and Fiscal Update 2017

Scenario Two - Softer Growth in the Domestic Economy

This scenario illustrates the possible implications for the economic and fiscal outlook when underlying momentum in the domestic economy is weaker than the main forecast. Tighter global financial market conditions - a decrease in the availability of credit in particular -are assumed to drive an increase in domestic lending standards and a higher degree of credit rationing than in the main forecast. As a result, activity in the housing market slows with less residential investment (Figure 3.6) and softer growth in house prices. Consumption expenditure on durables, such as household furnishings, is weaker as a result of fewer residential dwellings. We also assume households and investors have a lower appetite for risk in this environment, leading to lower domestic demand.

Figure 3.6 - Real residential investment
Figure 3.6 - Real residential investment
Sources: Statistics New Zealand, the Treasury

In the labour market, weaker activity translates into lower employment growth, a higher unemployment rate and slower wage growth. Annual CPI inflation is weaker across the forecast horizon and the Reserve Bank is assumed to remain on hold for longer.

Compared to the main forecast, real GDP growth peaks 0.4 percentage points lower (at 3.3% vs 3.7%) and six months later. However, with interest rates on hold for longer, the interest rate sensitive components of growth, such as residential investment, support an acceleration of growth later in the forecast period (Figure 3.6, Table 3.1).

Overall, nominal GDP is around $21 billion lower over the forecast period. Core Crown tax revenue is $8.1 billion lower (Figure 3.7), with lower source deductions (-$2.9 billion) and GST (-$2.3 billion).

Figure 3.7 - Core Crown tax revenue
Figure 3.7 - Core Crown tax revenue.
Source: The Treasury

As in Scenario One, we assume that the Government's operating and capital allowances are unchanged from those in the main forecast (see Chapter 2 for details). Under these assumptions, OBEGAL surpluses are smaller but increase to $3.3 billion (1.0% of GDP) in 2021, and net debt is higher (Table 3.1).

Table 3.1 - Summary of economic and fiscal variables for main forecasts and scenarios
June years 2017
Forecast
2018
Forecast
2019
Forecast
2020
Forecast
2021
Forecast

Real GDP (aapc*)

         
Main forecast 2.8 3.2 3.7 2.8 2.3
Scenario One: Higher terms of trade 2.8 3.6 3.8 2.8 2.3
Scenario Two: Weaker domestic activity 2.8 2.8 3.2 3.0 2.6

Nominal GDP

         
Main forecast (aapc) 6.2 5.1 4.9 4.7 4.1
      ($billions) 268.8 282.6 296.5 310.5 323.2
Scenario One: Higher terms of trade (aapc) 6.2 6.4 5.6 5.0 4.3
     ($billions) 268.8 285.9 301.9 316.9 330.7
Scenario Two: Weaker domestic activity (aapc) 6.2 4.6 3.7 4.1 4.0
     ($billions) 268.8 281.1 291.5 303.5 315.8

Operating balance before gains and losses 

         
Main forecast (% of GDP) 1.4 1.0 1.2 1.9 2.0
($billions) 3.7 2.9 3.5 5.7 6.4
Scenario One: Higher terms of trade (% of GDP) 1.4 1.2 1.7 2.5 2.7
     ($billions) 3.7 3.6 5.1 7.8 8.9
Scenario Two: Weaker domestic activity (% of GDP) 1.4 0.9 0.6 1.0 1.0
     ($billions) 3.7 2.5 1.8 2.9 3.3

Net core Crown debt (% of GDP)

         
      Main forecast 22.5 22.0 21.5 20.0 18.8
     Scenario One: Higher terms of trade 22.5 21.5 20.3 18.2 16.3
     Scenario Two: Weaker domestic activity 22.5 22.3 22.6 22.0 21.8

*annual average % change

Source: The Treasury

Page top