NZ economic outlook gloomier over next few years

Thursday 16th February 2012

The Treasury is more pessimistic, trimming forecast growth for New Zealand for the next two years, as global economic turmoil saps demand for local exports and dents confidence in financial markets.

The government department pared back expectations for economic growth in its latest forecasts prepared for the Budget Policy Statement, extending the gloomier outlook from last year’s briefing to the incoming minister.

Europe’s burgeoning sovereign debt crisis has put pressure on financial markets around the world amid heightened fears it will seep in global growth and weigh on New Zealand’s trading partners in the Asia Pacific.

The Treasury now predicts gross domestic product will expand 1.9 percent in the year ended March 31, 2012, and 2.8 percent in 2013, down from 2.3 percent and 3.8 percent flagged in the pre-election economic and fiscal update. Growth in the following 2014 year is forecast to expand at a pace of 3.8 percent compared to a previous 3.3 percent.

“We see particular risk around the first half of 2012 as it falls between the positive impacts of the World Cup in late 2011 and the assumed ramp-up of rebuilding in Canterbury from late 2012,” the Treasury said.

“Growth is then expected to be higher in the 2013/14 March year than previously expected, owing to the later rebuild and a more general recovery in the economy in line with an assumed rebound in trading partner growth,” it said.

The department flagged market confidence, weakening terms of trade, dwindling export demand and rising bank funding costs as the major threats to New Zealand’s economic recovery.

Earlier this month the Treasury said the deteriorating situation in Europe heightened risks to New Zealand’s economy and its trading partners, but wasn’t yet near a worst-case scenario.

“Risks to the economic outlook remain skewed to the downside,” the Treasury said. “In particular, there is a possibility of much worse outcomes for the euro area, which could lead to the global economy moving back into recession.”

Finance Minister Bill English reaffirmed the government’s commitment to return to an operating surplus by the 2014/15 year, though it would be a smaller $370 million figure, half of which would come from the proceeds of its partial asset sale programme.

“The economic outlook is somewhat weaker than forecast in the pre-election update in October, but remains positive,” English told a media briefing in Wellington.

If the economy was hit by a “very severe negative shock” the government would reconsider its commitment to the surplus, the BPS said.

English said the government will keep its operating budget allowance for new spending at $800 million over the next two years, rising to $1.2 billion in the following year, and growing an annual 2 percent beyond that.

The forecast operating deficit before gains and losses rose to $12.1 billion in the 2012 year from $10.8 billion predicted in the PREFU. It’s expected to shrink to $5.6 billion in the 2013 year, and $2.2 billion in 2014, before returning to surplus in 2015.

The Treasury predicts New Zealand’s labour market to remain tough, with the unemployment rate falling below 6 percent in the 2013, rather than the 2012 year previously forecast.

Inflation is likely to remain softer than previously thought, with the consumer price index expected to hold at an annual 2 percent pace in the 2012 and 2013 years, rising to 2.3 percent then 2.4 percent in the subsequent years.

The Treasury flagged a worse-than-expected current account deficit, which will rise to 6.5 percent of GDP in 2014 then 6.9 percent the next two years due to an increase in investment related to the Canterbury rebuild, and would deflate once the reconstruction effort winds down.

BusinessDesk.co.nz

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