Budget 2011: Growth to peak at 4% on Christchurch rebuild
By Pattrick Smellie
May 19 (BusinessDesk) – Inflation-adjusted economic growth will peak at 4% in 2013 before dropping back to 2.7% in 2015 as the short term boost from rebuilding Christchurch recedes, say updated economic forecasts published in the Budget.
Gross domestic product is expected to grow in real terms by just 1% in the year to June, 1.6% in the June 2012 year, and then 4% in the June 2013 year before dropping back to 2.7% in 2015. Driving those trends is an anticipated 53.5% increase in residential housing investment in 2013, and another 17.4% rise in 2014.
Over that time, inflation will fall back within the 1 to 3% target range, and is forecast at 2.6% in 2015, when the Treasury expects unemployment will have dropped from 6.8% at present to 4.6% of the workforce.
Although the Budget’s spending cuts and bullish tax revenue forecasts keep public debt just below the 30% of GDP level that might worry credit rating agencies, the forecasts show little improvement in New Zealand’s broader external position.
The balance of payments current account deficit, measuring the extent to which the country is consuming foreign capital to live beyond its means, improves because of reinsurance funds flowing into the country ahead of Christchurch reconstruction, turning briefly positive in the current financial year.
However, it blows back out to 6.9% by 2015 in the latest forecasts, approaching the 8% levels that analysts regard as unsustainably high. Likewise, New Zealand’s net external investment position only briefly improves and is back out at 85.3% of GDP in 2015, compared with 86% today.
This high level of foreign, mainly private debt is the key factor that continues to concern credit rating agencies, with Standard & Poor’s leaving New Zealand on a negative outlook for its AA+ rating in a statement released shortly after the Budget was published.
The forecasts also assume a significant fall in the exchange rate, from a high point of 67.2 on a trade-weighted index basis today to 56.0 in 2015. That’s more optimistic than the central bank’s latest forecast in its March monetary policy statement, which predicts the TWI falling to 63.5 by 2014.
While strong terms of trade caused by high export commodity prices are expected to remain, “long term fundamentals such as the requirement for external balance are expected to see the exchange rate fall,” the Treasury says. “A narrowing of the positive differential between local and global interest rates also contributes to the lower exchange rate.”
The forecasts assume that oil prices slip back from current levels to around US$100 a barrel and remain around that price over the forecast period. However, the Treasury identifies rising fuel prices as a risk to the expected pick-up in consumer spending, while conceding the global economy faces a greater risk of growing more slowly than the 4% annual growth trend assumed in the Budget.
“The international economy remains a source of downside risk to New Zealand, with the possibility of rising global imbalances causing increased policy tension, the need for significant structural and fiscal policy change in many developed economies (and) continued financial difficulties in a number of peripheral European economies.”
The forecasts also reveal a substantial difference in view between the Treasury and the Inland Revenue Department on the tax take over the four years covered in the forecasts, with the IRD estimating $1.5 billion less tax than the Treasury. This is a “larger difference than is usually the case,” the Budget documents say.
There is substantial risk also to the government’s plans to produce a surplus in 2015 from lower growth rates than forecast.
A 1% lower than forecast rate of nominal GDP growth would, by 2015, strip $3.38 billion from annual revenue expectations, with the exact timing of the Christchurch rebuilding phase being a key uncertainty.