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Monthly Economic Indicators

Special Topic: Comparison of Treasury Forecasts

This special topic compares Treasury's Pre-election Economic and Fiscal Update (PREFU) forecasts with 13 mostly-local other forecasters. The forecasts discussed in this special topic were finalised between late August and mid October, with PREFU finalised on 26 September; some differences between forecasts can be attributed to timing. The main points are:

  • Treasury's growth forecasts are close to the average of other forecasters for most years.
  • Key uncertainties identified by other forecasters include the timing of the Canterbury rebuild and the global outlook.
  • Treasury's forecasts for most key economic variables are close to the average.

Growth forecast to accelerate…

All forecasters expect GDP growth to accelerate over 2012 and 2013, as the New Zealand economy continues to recover from the GFC and the Canterbury rebuild adds to GDP. However, forecasts for growth vary widely, reflecting the great deal of uncertainty present at this time. The timing of the Canterbury rebuild and the recent deterioration in the global outlook were two key uncertainties identified by forecasters; different assumptions help to explain forecast differences. Treasury's growth forecasts are slightly below the average of other forecasters for 2012 and 2013, and slightly above for 2014 and 2015 (Figure 1).

Figure 1 – GDP growth, March years
Figure  1 – GDP growth, March years.
Sources: The Treasury, other forecasters[1]

… but global outlook remains key risk

The deteriorating global outlook, one of the key uncertainties, is a key area of contention among forecasters. Sentiment can change quickly, and the effects on the New Zealand economy, while limited thus far, could be significant depending on how events unfold. Treasury's forecasts for trading partner growth (growth weighted by export shares for New Zealand's top 16 trading partners) are overall slightly below the IMF's September World Economic Outlook forecasts (although the same for 2012), and very similar to October's Consensus Economics forecasts (an average of international forecasters). The risks to the outlook are skewed to the downside, with developments in Europe a major concern. For further details on assumptions made, and Treasury's downside scenario, refer to the PREFU release.

Inflation expected to moderate

Forecasters see annual inflation falling after 2011, as the rise in GST and other government charges fall out of the annual calculation. Annual inflation will not fall as low as it otherwise would, however, due to the impacts of the rebuild on inflation. There are questions surrounding the capacity constraints causing prices, in particular for construction, to rise. This has caused a great deal of uncertainty, with a wide range of inflation forecasts (Figure 2). Treasury's inflation forecast is in line with the average of 2.8% for the 2012 March year, but slightly lower later in 2013.

Figure 2 - CPI, March years
Figure 2 - CPI, March years.
Sources: The Treasury, other forecasters

Interest rates to rise, but more slowly than previously expected

Only a few months ago, expectations were for interest rate rises as soon as September, but with the slowdown in the global economy, and turmoil in Europe, expectations were tempered. Forecasters expected rates to rise from around March 2012, with the market pricing in an increase by September 2012. The recent lower-than-expected CPI outturn for the September quarter may lead some analysts to push back rate hikes. Forecasters who finalised earlier tended to have their 90-day interest rate tracks increasing faster. Treasury's 90-day interest rate track is slightly lower than the average, with 3.5% and 4.2% expected at the end of 2012 and 2013 respectively, compared to the averages of 4.0% and 4.6%. This is consistent with Treasury's lower-than-average inflation forecasts in this period.

Unemployment rate expected to fall

All forecasters expect the unemployment rate to decline over the forecast period. Treasury's unemployment rate forecasts are slightly lower than the average for March years, with an end point in 2015 of 4.7%. The Canterbury rebuild is expected to be a strong driver of the fall in unemployment, with the construction sector presently below capacity.

Exchange rate to remain elevated in near-term

Treasury's exchange rate forecasts are close to the average across the forecast period. Global developments have tended to be the main drivers recently, with the NZD hitting record highs against the USD, EUR and GBP, before retreating as global risk aversion returned. The assumption made by Treasury, and most other forecasters, was to hold the TWI relatively constant, before slowly depreciating to a more fundamentally-driven position. This is a change from the Budget forecasts, where the exchange rate was forecast to depreciate more quickly, and to a lower level.

Current account deficit to increase

Forecasts for the current account are difficult to compare due to revisions Statistics New Zealand made to New Zealand's net international investment position (NIIP) on 21 September, and thus the current account. Treasury's current account forecast is significantly different from other forecasters due to revisions in data and a higher terms of trade (Figure 3).

Figure 3: Current account, March years
Figure 3 - Current account, March years.
Sources: The Treasury, other forecasters

Forecasting is always subject to uncertainty and error, especially at present with the global turmoil and uncertainty concerning the Canterbury rebuild. A report released earlier in the year finds that Treasury's forecast performance compares favourably with other similar forecasters of the New Zealand economy, with the Treasury ranking either first or second for forecasts of real GDP growth and CPI inflation over the 2000 to 2010 period, on average, for current-year and one-year-ahead forecasts.


  • [1]Other forecasters include: ANZ, ASB, BNZ, BERL, Deutsche Bank, Goldman Sachs/JB Were, IMF, Infometrics, Macquarie, NZIER, RBNZ, UBS and Westpac.
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