Opening Statement Delivered to the Finance & Expenditure Select Committee

Opening statement delivered to the Finance & Expenditure Select Committee by the Secretary to the Treasury, Gabriel Makhlouf, 18 November 2015.

Good morning

I'd like to begin by giving you a brief update on the current state of the global and domestic economies, and as showcased in our Annual Report for 2014/15, what the Treasury is doing to contribute to keeping the New Zealand economy on track.

The big picture #

Globally, we face some uncertainty. The IMF and World Bank have lowered global growth forecasts for 2015 and 2016; and while the US and the UK economies are strengthening, growth in emerging economies is slowing. The weekend terrorist atrocities in Paris have created additional uncertainty but the reaction in global markets has been subdued so far. The Treasury is monitoring the situation closely.

China's growth has slowed, which has flow-on impacts to other important trading partners for us, including Asia and Australia. Here at home, we are experiencing lower growth than expected at the time of the Budget, but it is important to stress that our economy remains in a relatively solid position.

The US saw annual jobs growth in October rise by 2% and its unemployment rate fell to 5% - the lowest level since the global financial crisis in early 2008.

On the flip side, recovery in Europe and Japan is best described as sluggish with September quarter GDP growth weak at 0.3% in the Eurozone and Japan seeing a second quarter of contraction in GDP, down 0.2%.

This slowdown is affecting developing commodity exporters such as Brazil and their more developed counterparts such as Canada and Australia. Weak demand in Japan and Europe for China's manufactured exports is also playing its part.

However, China itself is relatively insulated from the developments as it does not have large external debt – it lends to the rest of the world, especially the US. It also has a partially closed capital account and internal controls over both interest and exchange rates.  Nonetheless, China does have to contend with high internal debt and an oversupply of overvalued housing which, of themselves, create financial stability risks.

Elsewhere, higher interest rates could affect developing economies such as Brazil, South Africa, Indonesia and Turkey. Any emerging market debt crisis would have implications for the global economy.

In summary, the diverging trends in the world economy between a recovering US economy and slower growth elsewhere brings increased risk as the US Federal Reserve prepares to raise interest rates, thereby increasing the cost of world capital.


Following the overnight Global Dairy Trade auction, prices remain above their August post-GFC low. The auction saw prices fall some 8%, the third consecutive fall.

Current state of play in New Zealand#

Here in New Zealand, recent economic data points to a stabilisation in the outlook with growth in the second half of 2015 expected to return to trend, albeit weaker than forecast in the Budget Update. Growth of around 0.6% per quarter in the second half of 2015 means that increases in the December quarter, year on year, may fall below 2%, compared to the Budget Update forecast of 3%.

Inflation remained at 0.4% in the year to September, but is expected to pick up as a result of higher tradables inflation as petrol price falls a year ago drop out of the annual figure, and as a result of the lower New Zealand dollar.

Housing demand has been boosted by historically fast population growth and low interest rates while annual house price growth has been driven not just by price increases in Auckland but also a strong pick-up in other regions, especially the North Island where buyers sought more affordable options.

Auckland demand showed signs of easing ahead of the Reserve Bank's regional loan-to-value restrictions which came into effect earlier this month and tighter taxation rules on investment properties which applied from 1 October.

Export values grew solidly in the September quarter, lifted by a lower NZD. If sustained, this will support export revenue in the December and March quarters.

Falls in the terms of trade will subtract from nominal GDP growth in the second half of 2015. Services export levels were up during the September quarter with arrivals in September up 12.2% from the same time last year, led by Australian and Chinese visitors.

Annual employment growth has eased from the 3.5% pace in 2014 to 3 per cent in the year to June, and in combination with solid labour force growth, this has led to unemployment rising to 6.0%. However, we must not lose sight of the fact that New Zealand has had relatively high labour supply and participation rate in recent times.

What has The Treasury been doing?#

Amidst the range of factors which influence our economic position there is one thing we have firmly in our sights – namely the need to manage the nation's finances effectively and to maintain a strong balance sheet that can withstand any shocks that might come our way.

The Treasury recognises the need to maintain a strong understanding of the things that matter most for New Zealand's economic performance. During the past year we published a narrative on the opportunities and challenges for the country's economy, developed using the Living Standards Framework.

Maintaining a strong balance sheet and the way we are managing capital remain top priorities. We need to remain resilient to shocks and stay on course with a fiscal strategy that aims to reduce debt while sustaining value from operating and capital spending.

Part of that entails using social investment to support the Treasury's vision of working towards higher living standards for New Zealanders, where data and analytics tools are proving invaluable. This also means investment can be targeted where it is needed most.