Economy to run “below potential” for next 5 years: Treasury

Economy to run “below potential” for the next five years: Treasury

By Pattrick Smellie

Dec. 14 (BusinessDesk) – New Zealand’s weak economic recovery will see the country performing below its true potential for another five years, although the gap will narrow and be “approximately closed by 2015,” say the latest Treasury forecasts.

Potential output is a measure of growth rates possible without creating excessive inflation, and is calculated to be around 2.5% a year.

“Growth in potential output is estimated to have eased back from what was expected prior to the 2008/09 recession, largely accounted for by a marked fall in capital investment in the last two years, and partly owing to a reassessment of the level of potential output before the recession,” the Treasury Half Year Economic and Fiscal Update says.

“Over the next five years, actual output growth is expected to exceed growth in potential output. Consequently, the gap between the two measures narrows gradually and is approximately closed by 2015.”

The Treasury is forecasting growth of 2.5% for the year to March, down from 3.3% forecast in the May Budget, rising to 3.4% in the year to March 2012, and dropping back to 2.8% in 2013, and sees unemployment tracking back down to a historically low 4.5% by March 2015.

A tumbling tax take is contributing to a prolonged period of higher cash deficits than forecast over the next three years, but the subdued recovery means the balance of payments deficit will blow out less than previously feared, and the country’s net external liabilities are now expected to top out at around 90% of Gross Domestic Product. Previous forecasts had external liabilities heading above 100%.

The current account deficit is now forecast to peak at 6.8% of GDP in the year to March 2012.

However, additional financing costs caused by additional government borrowing will rise from $2.3 billion in the year to June 2010 to $4.9 billion in the June 2015 year.

The impact of the recession on business profits is graphically illustrated in the Treasury’s expectation that more than $18 billion in accumulated tax losses have been wracked up.

That’s up 30% on last year’s level and has “pushed the stock of tax losses up to about twice its level after the recession of the late 1990’s,” the Treasury says. “These losses will be progressively offset against profits in future tax years, thereby reducing business income tax revenue, with a consequential tax shortfall forecast at around $350 million a year until 2015.

The Treasury also warns that, unlike past recoveries, New Zealand is not benefitting from a weak exchange rate to boost exports. While the kiwi dollar fell in the 2008/09 recession, it has bounced back and is “currently around the same level as it was prior to the recession and high by historical standards.”

“The exchange rate is forecast to remain elevated in the near term, reflecting market forces, before falling owing to fundamentals, such as New Zealand’s high level of international indebtedness and a recovering global economy.”

(BusinessDesk)

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