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Medium-Term Economic Challenges

Introduction

This briefing sets out a short assessment on what the Government can do to ensure New Zealanders will have world-class opportunities and incomes into the medium term. The advice reflects the Treasury's perspective as your economic and financial advisor.

This briefing discusses New Zealand's medium-term economic outlook

New Zealand's economic fortunes are tied to those of the world economy. In the immediate future, international economic conditions will be dominated by events in the financial sector and their aftermath. The instability of global financial markets has required radical policy responses to stabilise financial systems. The full impact of this instability on economic activity remains uncertain, but a key factor will be the speed with which stability returns to financial markets. Economic growth has already weakened significantly around the world accompanied by substantial losses in wealth. These international developments are hitting New Zealand at a time when the domestic economy has slowed and an extended period of fiscal deficits is projected. The international financial situation has also highlighted the vulnerability associated with New Zealand's very high level of external private debt.

Economic outlook: Growth has slowed sharply in New Zealand and our trading partners

Real GDP growth: Pre-election update
Real GDP growth: Pre-election update.
Source: Treasury Pre-election Economic and Fiscal Update
Trading partner growth: downside scenario
Trading partner growth: downside scenario.
Sources: Treasury and Consensus Economics

Managing the economy through the immediate pressures will be a critical focus in the early days of your newly formed administration. At the same time it will be important to maintain a focus on the medium-term policy direction, to ensure New Zealand continues to improve its economic performance. The policy challenges and directions identified in this report that aim to raise medium-term economic performance will remain critical even if the economic situation worsens further in the short term. For example, lower growth for a more extended period of time would make the current difficult fiscal position more acute, making it more pressing to improve public sector performance and address long-term fiscal challenges.

While the current economic situation is extremely challenging, the focus need to remain on lifting the medium-term economic performance

This briefing aims to assist you to look beyond short-term pressures to the medium-term environment for growth and productivity. We have also separately updated projections of the economic and fiscal situation, and in light of this are ready to advise on advancing your more immediate policy priorities and responses to the rapidly evolving financial stability risks.

New Zealand's growth story is a productivity story. For our workers and businesses to have world-class opportunities and incomes, our businesses need to make the most of the potential in our people, our ideas and our natural environment. There are profound changes occurring globally and domestically that are transforming the way business is done and the types of products and services in demand. These trends offer New Zealand opportunities for better economic performance if we position ourselves to take advantage of them. However, making the changes needed to position ourselves will be challenging. There are some significant implications for our policy settings if government is to provide an environment in which businesses and individuals participate fully in the new world. If we do not make these changes New Zealand risks a gradual decline in our relative living standards.

New Zealand ranks higher on relative measures of quality of life than GDP per capita

Quality of life and per capita GDP
Quality of life and per capita GDP.
Source: Economist Intelligence Unit

This briefing discusses:

1   The centrality of business productivity to our living standards

2   The opportunities and challenges New Zealand will face over the next five to 15 years

3   How well positioned New Zealand currently is to respond to these changes

4   Broad policy directions that would improve New Zealand's productivity over the medium term.

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