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Briefing to the Incoming Minister of Finance: Increasing Economic Growth and Resilience [2011]

4 New Zealand's Recent Economic Performance and Key Policy Challenges

The repercussions of the Global Financial Crisis continue to dominate international economic developments. Since mid-2011, global financial markets have again displayed heightened risk aversion and uncertainty, amid signs of slower growth and concerns about public debt sustainability in Europe and the US. Forecasts of global growth are being revised down, driven by a weaker outlook in many advanced economies, particularly in Europe.

The Pre-election Economic and Fiscal Update 2011 (PREFU) forecasts were finalised in late September and assumed that overall trading partner growth would evolve broadly in line with the historical average. Growth in Asian trading partners and Australia was expected to offset lower growth in the US and Europe. European economies were assumed to manage their way through the current sovereign debt crisis, albeit with weak growth. The PREFU also included a downside scenario in which there was a more disruptive adjustment in Europe, accompanied by a slower recovery in the US and a major downturn in property markets in emerging Asia. Latest developments suggest trading partner growth in 2012 is likely to undershoot the main forecasts but, at this point, it remains some way from the downside scenario. Much weaker growth is still a risk. In addition, financial market developments mean that the availability and price of credit globally are more adverse than was built into our forecasts.

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