BUDGET 2012: NZ economic outlook deteriorates

Thursday 24th May 2012

New Zealand's economic outlook has deteriorated further, according to today's budget forecasts, on the continued delays to Christchurch's eventual rebuild and global instability emanating from Europe's sovereign debt woes.

The Treasury has trimmed the expected track of economic growth for the next three years, the second such downgrade since the pre-election fiscal and economic update last year. Gross domestic product is forecast to rise to 1.6 percent in the 2012 March year, 2.6 percent in 2013 and 3.4 percent in 2014. That's down from 1.9 percent, 2.8 percent, and 3.8 percent forecasts respectively in February's budget policy statement.

The latest figures are more in line with the downside scenario in the 2011 budget forecast, which was based on falling terms of trade, tepid consumer confidence and slower world growth.

"Aggregate price pressures in the economy have been weaker than expected, reflecting the strength of the exchange rate, lower commodity prices and a greater degree of spare capacity in the economy," the Treasury said.

Finance Minister Bill English said the Christchurch rebuild will be a key driver of economic growth, with residential housing investment forecast to rise by 29 percent in the 2013 March year, and a further 41 percent the following year.

Export volumes are set to be subdued as farming conditions slow after a strong production season, and a slowdown in New Zealand's trading partners is flagged as a risk to the main forecast.

"Our outlook remains positive - we're a food producing country with a rapidly growing middle-class in the Asia region," English said.

The Treasury's downside scenario in the 2012 forecast is based on slower growth in the country's Asian and Australian trading partners, resulting in lower export receipts and a smaller tax take for the government. That would see GDP growth of 1.6 percent in 2012, 2.5 percent in 2013, 2.6 percent in 2014 and 2.1 percent in 2015.

New Zealand household consumption is expected to slow to 2.2 percent in 2013 from 2.7 percent as the impact of last year's Rugby World Cup fades.

The Treasury is picking inflation to accelerate over the next two years as capacity constraints arise, though it isn't forecast to go outside the Reserve Bank's 1 percent-to-3 percent target band.

The country's record-low official cash rate of 2.5 percent is forecast to rise from early next year, though "the pace and extent of interest rate rises are dependent on the strength of the exchange rate, the strength of domestic demand and conditions in financial markets."

The Treasury's forecasts assume New Zealand's net migration turns positive in the 2014 year as the country's economy outperforms Australia and the Christchurch rebuild attracts workers from overseas. It also assumes productivity growth of about 1.4 percent a year over the next four years, rising interest rates from next year, and a falling exchange rate.

While the economic outlook for the country got soggier, the fiscal outlook for the Crown accounts improved on a grab-bag of spending cuts to ensure the books are back in the black by 2015.

The government faces an operating deficit before gains and losses of $8.4 billion in the 2012 June year, an improvement from the $10.8 billion deficit flagged in the Prefu, with smaller operating shortfalls in the subsequent two years before hitting a wafer-thin surplus $197 million in 2015.

BusinessDesk.co.nz

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