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New Zealand Economic and Financial Overview 2016

Economic and Fiscal Forecasts

Economic growth slowed in the first half of 2015 and was lower than anticipated in the 2015 Budget Update. Economic growth is expected to remain muted in the near term in response to weak global and domestic demand and lower terms of trade. El Nino weather conditions, coupled with existing price signals, are likely to depress agricultural production and exports in early 2016. The degree of spare capacity in the economy is expected to increase further as growth slows, resulting in higher unemployment and lower non-tradables inflationary pressures. Real GDP growth is forecast to ease to 2.1% in the year to March 2016.

Growth is expected to pick up in the second half of 2016 and remain above trend for most of the latter part of the forecast. Exports are expected to recover in response to the recovery in the terms of trade, the weaker dollar and as the agricultural sector recovers from El Nino, with further support from strong travel service exports. Stimulatory monetary policy conditions are expected to support domestic consumption and investment. Increases in the Government's operating and capital allowances increase public consumption and non-market investment respectively. Unemployment falls as spare capacity in the economy declines.

Nominal GDP growth is expected to slow in the near term in response to slower real GDP growth and the lower terms of trade. Strong nominal GDP growth in later years, as real GDP growth picks up and the terms of trade increase, does not return nominal GDP to previously forecast levels. For the fiscal years 2014/15 to 2018/19, nominal GDP is forecast to be a cumulative $17 billion lower compared to the 2015 Budget Update.

Key factors influencing the economic outlook include judgements around trading partner growth, the future path of commodity prices, the impact of El Nino, the extent and duration of the current migration cycle and the relationship between inflation and spare capacity.

The Crown's fiscal position has improved over the past few years with an operating balance excluding gains and losses (OBEGAL) surplus being recorded in the 2014/15 fiscal year for the first time since 2007/08 (up from a deficit of $18.4 billion in 2010/11) and compared to a forecast deficit at the 2015 Budget Update. However, the more moderate outlook for the economy means OBEGAL is now expected to be broadly in balance over the next few years with a small deficit forecast for 2015/16 and modest surpluses from 2016/17. Net core Crown debt is expected to peak at 27.7% of GDP in 2016/17, before dropping to 24.0% of GDP by 2019/20 reflecting increasing cash flows.

Table 5 - Summary of Economic Forecasts[1]
March Years
Annual Average % Change
2015
Actual
2016
Forecast
2017
Forecast
2018
Forecast
2019
Forecast
2020
Forecast
Private consumption 3.1 2.7 2.3 2.3 2.5 2.1
Public consumption 2.8 2.7 1.0 1.9 1.9 0.9
Total Consumption 3.0 2.7 2.0 2.3 2.3 1.8
Residential investment 12.3 5.9 6.7 4.9 2.8 1.4
Non-market investment 2.1 10.7 8.0 3.0 (9.5) (0.8)
Market investment 4.6 3.5 3.4 4.2 6.3 3.3
Total Investment 6.5 3.6 4.6 4.4 4.4 2.6
Stock change[2] 0.1 (0.3) (0.1) 0.2 0.2 0.3
Gross National Expenditure 3.8 2.8 2.6 2.9 3.0 2.4
Exports 4.2 2.9 0.1 4.3 4.2 2.8
Imports 7.5 4.1 0.7 2.2 4.2 3.2
Expenditure on GDP 3.0 2.1 2.4 3.6 3.0 2.2
GDP (production measure) 3.2 2.1 2.4 3.6 3.0 2.2
Real GDP per capita 1.6 0.2 0.7 2.5 2.1 1.3
Nominal GDP (expenditure basis) 3.6 2.7 3.0 6.0 5.6 4.1
GDP deflator 0.6 0.5 0.5 2.3 2.5 1.9
Output gap (% deviation, March year average)[3] (0.4) (0.8) (1.0) 0.0 0.5 0.3
Employment 3.4 1.4 1.3 1.9 2.4 1.6
Unemployment rate[4] 5.8 6.5 6.1 5.3 4.7 4.5
Participation rate[5] 69.5 68.7 68.5 68.6 69.0 69.0
Nominal wages[6] 2.1 2.6 1.8 2.2 2.8 3.3
CPI inflation[7] 0.3 1.4 2.1 1.9 2.1 2.2
Terms of trade[8] (0.8) (3.7) (2.2) 2.5 2.6 (0.3)
House prices[9] 8.9 16.0 5.4 2.3 2.0 2.0
Current account balance - $billion (8.3) (11.8) (15.0) (12.1) (10.9) (12.5)
Current account balance - % of GDP (3.5) (4.8) (6.0) (4.5) (3.9) (4.3)
TWI[10] 77.9 68.5 66.4 68.0 69.3 69.2
90-day bank bill rate[10] 3.6 2.6 2.6 3.4 4.2 4.5
10-year bond rate[10] 3.3 3.3 3.5 4.2 4.6 4.8

Source: The Treasury

  • [1]Forecasts finalised 20 November 2015.
  • [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. 2015 actual.
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