Economy can grow faster than thought before inflation bites, says Treasury

Tuesday 16th December 2014

Economic growth is expected to average a historically high annual rate of 2.8 percent over the next five years, although growth will peak in the year to March 2015 at a slightly lower level than was forecast in the budget in May, the government’s half year economic and fiscal update says.

Lower than expected inflation means the nominal value of economic activity will be lower, reducing forecast government tax revenues and removing the forecast budget surplus for the year to June 2015.

But it also means the annual average potential growth rate while keeping inflation stable has been raised to 2.4 percent in the current financial year, peaking at 2.9 percent in mid 2016, before falling back to 2.3 percent by the end of the forecast period, in 2019.

Forecast growth in the next three March years are 3.5 percent, 3.4 percent and 2.8 percent respectively, before the impact of possible tax cuts that today’s Budget Policy Statement signalled will be in prospect in the election year budget in 2017. By March 2019, annual economic growth is expected to have fallen back to 2.2 percent.

“New Zealand is performing pretty well in a world that remains uncertain,” said Finance Minister Bill English in a briefing to media accompanying the publication of the HYEFU and BPS at the Treasury.

Unemployment is forecast to continue falling from 6 percent in the year to March 2014 to 5.4 percent by next March and 4.5 percent in March 2019. Labour force participation rates remain elevated compared to other developed economies at around 68.8 percent, despite strong ongoing net inward migration that is seen peaking in the year to March 2015 at a net 52,400 new arrivals.

The Treasury forecasts assume a considerably stronger New Zealand dollar than forecasts in the Reserve Bank of New Zealand’s monetary policy statement last week, with the trade weighted index forecast at 76.6 in March 2017, compared with the RBNZ’s forecast of 73.6.

It sees some increase in interest rates to a 90 day bill rate of 4.4 percent in March 2017, roughly the same as the 4.5 percent forecast from the central bank.

“Recent unexpected falls in oil prices (are) expected to lower tradable inflation,” the HYEFU economic commentary says.

While nominal wages are forecast to grow faster than inflation at 2.8 percent a year for the next two years, the forecasts assume a slight fall in average hours worked per week from 33.5 to 33.2 hours while annual labour productivity is forecast to grow by 1.3 percent annually.

With lower export receipts, especially from dairy products, the domestic consumption and new business investment are expected to be a larger contributor to the growth outlook than previously expected.

Growth in construction activity starts to ease from the 17 percent growth seen in the year to March this year to 15.3 percent, 12.2 percent and 4.5 percent over the years to March 2015, 2016 and 2017 respectively.

House price inflation is presumed to have peaked in the year to March 2014 and is forecast at 4.5 percent and 3.9 percent over the next two years. The consumers price index is forecast to sit at or about the 2 percent annual target rate in 2016 and 2017.

The balance of payments deficit is affected by the lower track for export receipts, rising from 2.7 percent of gross domestic product in the March 2014 year to peak at 6.2 percent in March 2016, before falling back to 5.9 percent of GDP by March 2019. If, however, the terms of trade prove to be weaker for longer than forecast, the Treasury forecasts a scenario where the current account could blow out to close to 8 percent of GDP over the next two years.

BusinessDesk.co.nz

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