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Economic Outlook

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In the recently released Budget Economic and Fiscal Update by The Treasury in May 2017, some of the key findings of the New Zealand Economy for 2016 were outlined. The important components of these findings are as follows:

  • Over 2016 the New Zealand economy grew 3.1% in real terms and 5.5% in nominal terms, underpinned by investment, private consumption (supported by strong migration inflows) and low-interest Gross Domestic Product (GDP) per capita grew 0.9% and the current account deficit narrowed to 2.7% of GDP.
  • Growth was moderately weaker than expected as exports, residential investment and business investment grew at a slower pace than anticipated.
  • Trading partner growth was steady in the second half of 2016, in part because faster growth in the US was offset by slower growth in Australia.
  • New capital spending was increased to $4.0 billion (compared to $3.0 billion previously forecast). The capital allowance for Budget 2018 has been set at $2.0 billion and $2.5 billion for Budgets 2019-21.
  • The Crown’s fiscal position has improved over the past five years with an operating balance before gains and losses (OBEGAL) surplus being recorded in both the previous two fiscal years

Real GDP growth in the New Zealand economy is forecast to pick up slightly in 2017, supported by migration inflows, investment and a recovery in exports. Growth is then forecast to accelerate to a peak of 3.8% in 2019 as investment growth gains momentum and private consumption is supported by income gains associated with the Family Incomes Package. Slower population growth as net migration inflows subside, easing construction growth and rising interest rates contribute to a moderation in real GDP growth to 2.4% by 2021. Nominal GDP growth averages 5.1% per year over the forecast.

Unemployment is expected to remain around 5% over the year ahead, as robust employment growth is balanced by high labor force growth, before steadily declining to the long-run unemployment rate of around 4.%. Underlying inflationary pressures are expected to rise as spare capacity in the economy is used up, stabilizing CPI inflation around 2% from mid-2019.

Budget 2017 sees the introduction of a Family Incomes Package that both reduces tax revenue and increases social assistance expenditure such as Working for Families, with the 2019 June year being the first full year of these changes. New operating spending averages $1.8 billion per year over the forecast period (compared to $1.5 billion previously forecast). Future operating allowances have also been increased with new operating spending set at $1.7 billion for Budget 2018, increasing by 2% for subsequent Budgets.

Net core Crown debt is expected to decline as a percentage of nominal GDP over the forecast period, to stand at 19.3% by 2020/21. Net core Crown debt, in nominal terms, increases in the first three years of the forecast before beginning to decline to $62.8 billion by 2020/21.

The economic outlook is subject to a range of risks and uncertainties, with global risks skewed to the downside while domestic risks are more balanced. The fiscal outlook will be affected if risks were to eventuate and have a material impact on the economy.

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