New Zealand Economic Outlook - Miles Workman June 2017 - Audit New Zealand
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New Zealand
Economic Outlook
Miles Workman
June 2017
1Economic Outlook – Overview
The New Zealand economy is forecast to expand at a GDP Growth
solid pace over the next five years… Annual average % change
10
• With real GDP growth around 3% in 2017:
Forecast
• underpinned by high net migration inflows 8
and low interest rates, which support private
consumption and investment 6
• elevated tourist numbers support services
4
exports. Goods exports recover alongside the
dairy sector 2
• Growth accelerates to a peak of 3.8% in 2019 as:
0
• the above drivers of growth persist
• strong demand for housing continues as -2
temporary factors restraining growth in
residential investment subside
• the Family Incomes Package supports private Real Production GDP Nominal Expenditure GDP
consumption
• Growth eases to a more sustainable pace (around 2.5%) by 2021
As spare capacity in the economy is absorbed, inflationary pressures build, interest rates rise and the
unemployment rate approaches its long run rate of 4.25%
Solid real growth, along with rising inflation and the terms of trade remaining elevated, support nominal
GDP, tax revenues and a steadily improving fiscal position 2International Outlook
• Stable outlook for trading partner growth,
but many risks
• The Australian economy continues to transit New Zealand's trading partner growth
from mining investment towards other
Annual % change
drivers of growth
6
Forecast
• Growth in China continues to slow as the
5
economy shifts from investment-led growth
towards consumption
4
• Momentum in the US persists into the near 3
term, but there is heightened uncertainty
around the medium-term outlook 2
• Growth in the UK expected to weaken on 1
Brexit
• uncertainty constrains investor 0
appetite
• higher inflation (from the weaker -1
pound) erodes purchasing power, 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020
dragging on consumption
• Growth in the euro area and Japan remains moderate with monetary policy remaining highly
stimulatory 3Net migration inflows support domestic
demand…
• Reflecting relatively favourable
economic conditions in New Zealand,
net inward migration is currently at
PLT Migration
Annual sum (000s)
record levels of around 72,000 per 140
annum
120
• Net migration is assumed to decline 100
gradually over the forecast period as Forecast
the real wage differential between New 80
Zealand and Australia returns trans-
60
Tasman flows to a net outflow and as
non citizen arrivals ease 40
20
• Net migration adds 212,000 people to
the population over the forecast period 0
• increasing the productive
-20
capacity in the economy through 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020
increased labour supply
Arrivals Departures Net Migration
• supporting investment
• boosting demand for goods and
services
4…along with low interest rates
Annual % change
CPI Inflation Monetary Conditions
% Index
7 10 90
Forecast
6
Forecast 8 80
5
6 70
4
3 4 60
2 2 50
1
0 40
0
90-day rate Trade weighted exchange rate (RHS)
• Annual inflation was above 2% in the 2017 March • Interest rates are assumed to remain low for some
quarter, boosted by previous oil price declines time, increasing from late 2018 in response to
dropping out of the annual calculation and increasing inflationary pressures
unseasonally-high food prices (on bad weather)
• The exchange rate is assumed to remain broadly
• These transitory impacts drop out in a year, but stable
underlying inflationary pressures continue to build
5Household consumption continues
to grow at a solid pace
Real Private Consumption • Strong consumption growth in the
near term reflects recent momentum
Annual average % change
and population growth
7
Forecast
6 • Low interest rates support
5 consumption, particularly for durable
4 goods
3
• The Family Incomes Package is
2 forecast to commence on 1 April 2018
1 • households expected to spend
0 the majority of the tax cut on
-1 consumption
-2 • impact on labour supply broadly
2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 neutral
• stronger demand supports
employment growth
• Consumption growth eases later in the forecast period • modest contribution to
as population growth slows and interest rates rise inflationary pressures
6Investment underpinned by strong
fundamentals
Real Investment • Strong fundamentals continue to underpin
Annual average % change demand in the housing and construction
30 sectors, including:
Forecast • population growth
20
• high tourist numbers
10
• low interest rates
0 • However, capacity constraints push
construction costs higher, limiting the
-10 supply response
-20
• Residential investment is expected to slow
in the near term reflecting the impact of
-30
tighter LVR restrictions and uncertainty
2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 around the Auckland Unitary Plan
Residential Investment Business Investment
• But picks up again as these temporary
factors subside
• Business investment picks up in response to solid
demand for goods and services (driven by • Overall, house price growth moderates over
population growth) and to accommodate the forecast period, but picks up for a brief
expansion in the workforce period as residential investment growth
slows 7Labour market tightens, but wage
growth modest
Labour Market
% of labour force Annual % change
• Solid population growth adds to the size
7 7
of the labour force (and to the degree of
spare capacity in the economy) 6 6
• Strong employment growth outpaces 5 5
growth in the labour force and the
4 4
unemployment rate gradually declines
3 3
• Wage growth is expected to pick up in
the near term, recovering from recent 2 2
weakness and, in part, reflecting the 1 Forecast 1
impact of higher inflation on wage
negotiations 0 0
• Overall, wage growth is relatively modest
owing to strong labour supply and the Unemployment rate
fact that much of the jobs growth is in the Average ordinary time hourly wages (RHS)
services sector
8Tourism remains strong
Short-term Visitor Arrivals and Services Exports • Short-term visitor arrivals are at record
levels – 3.6 million people in the year to
Annual sum (millions) $ billions, annual total
4.0 30
April 2017
3.5 25
• Growth in arrivals has been strong from
China, Australia and the US
3.0 20
• Tourism accounts for around 20% of total
2.5 15
export earnings and 60% of services
exports
2.0 10
• Over 7% of people employed in New
1.5 5 Zealand work in the tourism industry
1.0 0 • Tourism is expected to remain strong
2000 2002 2004 2006 2008 2010 2012 2014 2016 over the forecast period, reflecting:
Short-term visitor arrivals Nominal services exports (RHS)
• structural change in China
• retiring baby boomers in the US
• rising incomes, especially in
emerging economies
• relatively low travel costs (on oil
prices) 9Exports recover, but current account
deficit widens
• The current account deficit is forecast Annual current account
to widen % of GDP
4
• The income deficit widens owing to Forecast
rising interest rates 2
• The services surplus holds up, 0
reflecting buoyant tourism
-2
• The goods deficit widens as strong
domestic demand drives stronger -4
growth in imports relative to exports
-6
• However, goods exports pick up
• Dairy is poised to grow strongly -8
following two very hard seasons 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020
for farmers Current account Income balance
• Forestry exports supported by a Services balance Goods balance
strong housing market in China
• Horticulture and viticulture
continue to do well
10The fiscal outlook continues to improve
OBEGAL and Net core Crown debt
$ billions % of GDP
10 30
Forecast
5 25
0 20
-5 15
-10 10
-15 5
-20 0
2007 2009 2011 2013 2015 2017 2019 2021
Total Crown OBEGAL (after inter-segment eliminations) Net core Crown debt (RHS)
11Summary
• The New Zealand economy is forecast to expand at a solid pace, underpinned
by:
– high net migration inflows
– strong visitor arrivals
– low interest rates
– higher disposable incomes owing to the Family Incomes Package
• The combination of solid real activity and rising prices support growth in
nominal GDP…
• …supporting tax revenues and rising OBEGAL surpluses over the forecast
period
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