Opening Statement Delivered to the Finance & Expenditure Select Committee

Good morning.

The Budget was released three weeks ago today and the Treasury’s Economic and Fiscal Update finalised more than a month before that, so I’d like to take a moment to update you on some key economic developments since those releases.

To set the scene, our December 2015 Half-Yearly Economic and Fiscal Update had revised the near-term outlook from Budget 2015 downward. That was due to weak domestic demand, low dairy prices and an uncertain world outlook.

However, with a rise in real and nominal GDP in late 2015, and tax revenues also up, the New Zealand economy has been stronger than expected: GDP up 0.9 percent in the December quarter, and sustained momentum in the first two quarters of 2016.

It appears now that our economy had hit a flat patch in early to mid-2015 and was in fact picking up in late 2015 and early 2016 due to:

• lower oil prices helping our terms of trade
• increases in tourism and the education of overseas students
• higher net migration flows into the country
• monetary conditions continuing to be accommodative, and
• construction activity driven by continuing strong housing demand.

Broadly speaking, the positive factors have been stronger and the negative factors weaker than expected. Inflation is a bit stronger than expected but still low at 0.4 percent in the year to March quarter, and employment is up, although that rise has been matched by growth in the labour force.

So, we’ve revised our forecast upward for the current year to June’s GDP growth:

• Production GDP growth up from 2.1 percent to 2.6 percent per year
• Nominal GDP up from 1.8 percent to 3.5 percent per year

This higher base of real and nominal GDP growth carries through the rest of our forecast period - to June 2020:

• Real GDP growth averages 2.9 percent, up from 2 percent at HYEFU, supported by faster population growth due chiefly to migration
• Nominal GDP is forecast to be $17 billion higher over the period than it was in HYEFU.

The OECD has released forecasts similar to ours, and the Reserve Bank’s Monetary Policy Statement also generally lines up with our forecasts. The IMF’s are lower than our BEFU forecasts, and the World Bank, in its latest economic outlook, revised down the prospects for global growth this year by half a percentage point to 2.4 percent, the same pace as last year.

In that context, current risks to the forecast include ongoing low inflation in major economies, the uncertainty in Europe about the UK’s referendum on membership in the EU, the growth path in the US economy, and the impact of monetary policy normalisation by the Federal Reserve on developing country economies.

Overnight, the Federal Reserve has announced no change in its funds rate.

And finally, also overnight, prices at the global dairy trade auction were unchanged from the previous auction two weeks ago, although whole milk powder prices eased slightly.

This result has no material impact on our forecasts.