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New Zealand Economic and Financial Overview 2015

Economic and Fiscal Forecasts

The Treasury's Half Year Economic and Fiscal Update (published 16 December 2014) forecasts a solid pace of expansion for the New Zealand economy over the next couple of years, underpinned by strong domestic demand owing to high net migration inflows, business investment and the Canterbury earthquake rebuild. Real production GDP is expected to expand 3.4% in the year to December 2015 and 3.0% in 2016. However, low domestic inflation and weak international commodity prices, particularly crude oil, mean nominal GDP growth will be slower.

As the impulse to growth from migration and the earthquake rebuild diminishes and monetary policy is gradually tightened in response to increasing capacity constraints, real GDP growth is expected to ease in 2016. In addition, the government's fiscal consolidation is expected to continue to weigh on domestic demand, and the high New Zealand dollar to continue to be a drag on exports, leading to forecasts of higher current account deficits as a percentage of GDP. Other factors leading to the likelihood of a higher current account deficit in the near term include rising imports for the Canterbury rebuild and generally strong domestic demand.

Economic growth amongst New Zealand's main trading partners remains positive but uneven. The economies of the United States and the United Kingdom are achieving a sustained recovery, led primarily by steady improvements in their labour markets, while activity in Australia is expected to pick up towards trend growth over the next few years. However, the outlook for Japan and the euro area is weak, while growth in China and many other emerging Asian economies is forecast to slow over the medium term.

The terms of trade fell in the September quarter 2014 from their 40-year high in June, and are expected to decline further in the near term, as prices of dairy exports continued to fall in the second half of 2014. The terms of trade are forecast to stabilise later in 2015 at above-average levels, and are expected to remain solid over the medium term on the back of stronger global demand, particularly from China. However, risks to this forecast are weighted towards weaker prices.

The fiscal position of the government is expected to continue improving over the medium term, with the operating balance deficit reducing in the 2014/15 fiscal year (ending on 30 June 2015), followed by a surplus in 2015/16. The operating surplus is expected to continue to increase as a percentage of GDP over the medium term. Net debt is expected to fall from 26.5% of GDP in 2014/15 to 22.5% in 2018/19.

Table 5 - Summary of Economic Forecasts(1)
March Years
Annual average % change
2014
Actual
2015
Forecast
2016
Forecast
2017
Forecast
2018
Forecast
2019
Forecast
Private consumption 3.3 3.6 3.4 3.1 1.7 1.6
Public consumption 1.7 1.6 (0.5) 0.1 2.8 2.5
Total Consumption 3.0 3.2 2.6 2.5 2.0 1.8
Residential investment 17.0 15.3 12.2 4.5 0.9 (2.6)
Non-market investment (2.6) (2.0) 5.1 2.4 2.4 2.4
Market investment 8.8 6.2 7.1 6.7 4.4 2.9
Total Investment 10.6 8.2 8.4 6.5 3.9 2.0
Stock change (2) 0.3 0.5 (0.8) (0.1) (0.1) 0.1
Gross National Expenditure 4.7 4.9 3.3 3.4 2.4 1.9
Exports 0.3 0.5 1.8 3.5 3.1 2.5
Imports 8.0 5.9 1.7 5.0 3.2 1.7
Expenditure on GDP 2.5 3.3 3.4 2.8 2.3 2.1
GDP (production measure) 3.2 3.5 3.4 2.8 2.3 2.2
 - annual % change 3.8 3.3 3.2 2.5 2.3 2.0
Real GDP per capita 2.2 1.9 1.8 1.7 1.3 1.3
Nominal GDP (expenditure basis) 6.7 3.0 4.9 5.7 4.1 3.6
GDP deflator 4.1 (0.2) 1.5 2.8 1.8 1.5
Output gap (% deviation, March year average) (3) (0.6) 0.1 0.6 0.6 0.3 0.2
Employment 2.5 2.9 1.7 1.6 1.3 1.1
Unemployment (% March quarter s.a.) (4) 6.0 5.4 5.1 4.7 4.5 4.5
Participation rate (5)  69.2 68.9  68.7  68.8  68.8  68.8 
Wages (average ordinary-time hourly, ann % change) (6) 2.5 2.8 2.8 3.1 3.3 3.5
CPI inflation (7) 1.5 1.3 2.0 2.1 2.0 2.0
Terms of trade (8) 13.5 (3.9) (3.6) 3.7 0.5 0.4
House prices (9) 8.0 5.4 3.9 2.5 2.3 2.0
Current account balance - $billion (6.0) (12.4) (15.2) (14.8) (15.4) (16.4)
Current account balance - % of GDP (2.7) (5.3) (6.2) (5.8) (5.7) (5.9)
TWI-5 (10) 78.7 76.5 76.5 76.6 75.6 73.6
90-day bank bill rate (10) 3.0 3.7 3.9 4.4 4.8 5.2
10-year bond rate (10) 4.6 4.0 4.2 4.7 5.0 5.1

Source: The Treasury

1) Forecasts finalised 10 November 2014

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, March quarter, seasonally adjusted

5) Percent of the working-age population, March quarter, seasonally adjusted

6) Quarterly Employment Survey, average ordinary-time hourly earnings, annual percentage change

7) Annual percentage change

8) System of National Accounts (SNA) and merchandise basis, annual average percentage change

9) Quotable Value New Zealand (QVNZ) House Price Index, annual percentage change

10) Average for the March quarter

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