BUDGET NZ govt sees faster growth as strong terms of trade, more jobs drive consumer spending

Thursday 15th May 2014

The government sees faster growth in the coming years as 40-year high terms of trade and an improving labour market drive increased consumer spending, and as the Canterbury rebuild looks like lasting longer than previously thought.

Gross domestic product is thought to have accelerated to 3 percent in the year ended March 31, 2014, before peaking at a decade-high 4 percent in 2015, up from the Treasury's December forecasts of 2.6 percent and 3.6 percent respectively, according to the Budget Economic and Fiscal Update. Growth then slows to 3 percent in 2016 and 2.1 percent in the following two years.

"This is the first budget in six years to manage a growing economy," Finance Minister Bill English said. "Our aim is to do what we can to extend steady economic growth which helps deliver more jobs and higher pay."

The Treasury's forecasts are more upbeat than the Reserve Bank's March projections by about half a percentage point, and sheet home rising household and business incomes to strong commodity prices which have underpinned 40-year high terms of trade, which are thought now to have peaked. In turn, that has supported higher than expected consumer spending and market investment.

The accelerating economy has been supported by decade-high inflows of net migration as fewer New Zealanders seek a better standard of living in Australia. As immigration from Asia grows, the Treasury sees net migration peaking at about 38,000 later in the year, before slowing to a long-term average inflow of 12,000 a year.

The flood of new migrants has been soaked up by the labour market, with government figures last week showing a participation rate at a record 69.3 percent in the March quarter and employment growth of 0.9 percent in the quarter.

The Treasury sees the unemployment rate falling to 5.4 percent in March 2015 from its current 6 percent rate, dropping to 4.4 percent by 2018, faster than the December forecasts. Nominal wages are forecast to rise at a faster pace of inflation over the four-year forecast horizon.

The Canterbury rebuild remains a major plank to the recovery, with reconstruction investment estimated to total about $40 billion, with half of that taking place before the middle of 2018. Of that, about $18 billion is expected to be on residential investment, $9 billion on commercial property, and $11 billion on infrastructure and social assets.

The Reserve Bank has tagged growing construction activity to cope with the Christchurch rebuild and meeting a housing shortage in Auckland as a potential inflationary pressure, and governor Graeme Wheeler embarked on tighter monetary policy in March, hiking the official cash rate twice to 3 percent since then.

The Treasury sees the consumers price index accelerating to an annual 1.8 percent in 2015, peaking at 2.5 percent the following year before slowing to 2.3 percent and 2 percent the following years. It also publishes housing inflation forecasts for the first time, anticipating a 7.3 percent increase in house prices in the year to June 2015.

An elevated New Zealand dollar is a major factor on the timing and pace of the Reserve Bank's interest rate hikes, and the Treasury sees a stronger exchange rate than in December, depreciating in 2017 and 2018.

English said inflation is probably slower than expected with annual growth of 4 percent and will come under greater scrutiny in the coming year.

"Inflationary pressures are a bit more moderate than might be expected and you'll see the debate unfolding over the next few months before Christmas as there's discussion about the Reserve Bank's interest rate track," he said.

The Reserve Bank has signalled it will continue to raise interest rates in a bid to keep inflation near the mid-point of its 1 percent to 3 percent target inflation, and the Treasury forecasts the 90-day bank bill, seen as a proxy for the OCR, rising to 4.3 percent in 2015 and 5.3 percent by 2018.

"Although 90-day interest rates are expected to be neutral at around 4.8 percent, further increases may be required to offset the upward price pressure generated by the projected fall in the exchange rate and to keep inflation expectations anchored close to 2 percent," the BEFU said.

The Treasury estimates the government's tighter fiscal policy relative to a neutral stance reduced inflationary pressure over the coming four years, allowing the OCR to be about 50 basis points lower by 2018, according to the Fiscal Strategy Report.

BusinessDesk.co.nz

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