Economic growth seen slowing as low commodity prices weigh

New Zealand's economic growth is expected to slow from previous forecasts as low global commodity prices weigh on the nation's exports of primary products, which account for about 15 per cent of the country's overseas sales.

Gross domestic product grew 3.3 per cent in the year ended March 30 according to the Treasury's latest forecasts in the 2015 budget, slower than the 3.5 per cent pace predicted in the December half-year fiscal and economic update. That pace of growth is seen shrinking to 3.1 per cent in the 2016 financial year, 2.8 per cent in the following two years, and 2.4 per cent at the end of the forecast horizon in 2019.

While that puts New Zealand in the top bracket of growth among developed nations, it pushes out about 0.7 of a percentage point of expansion in the 2015 and 2016 financial years to the 2018 and 2019 years.

Oil prices slumped last year as members of the Organisation for Petroleum Exporting Countries kept up supply in the face of rival producers, sapping inflation around the world, while a build-up in inventories of forestry and dairy products in China sent those soft commodity prices lower through 2014.

"Lower dairy prices are a headwind for growth, however, and global uncertainties remain," Finance Minister Bill English said in his address to Parliament. "Lower-than-expected prices also mean that nominal GDP - the size of the economy in dollar terms - is not rising as quickly as previously expected, despite solid growth in the real economy."

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The Treasury revised its forecast for exports, seeing growth of 2.2 per cent in the 2015 year, falling to 0.5 per cent in the 2016 year. It anticipates higher global oil prices with West Texas Intermediate forecast to rise to US$78 a barrel in the 2019 March quarter from US$49 a barrel, while whole milk powder is seen almost doubling to US$3,900 per metric tonne by the end of next year.

"The outlook for dairy and other export commodities is similar to the half year update, but oil prices are considerably weaker," the Treasury said. "Although still expected to decline in the short term, the terms of trade are expected to trough at a higher level and remain higher than the half-year update throughout the forecast, chiefly as a result of lower import prices."

The Treasury acknowledged that risks to the global commodity outlook were skewed to the downside. If a recovery in commodity prices weren't to eventuate, New Zealand's economic growth would be even slower in the out-years and inflation would take longer to the get to the 2 per cent mid-point of the central bank's target band between 1 per cent and 3 per cent.

The global slump in oil prices has led to a number of forecasters, including the Reserve Bank, to be surprised by the low pace of inflation, and the Treasury now predicts the consumers price index rose 0.2 per cent in the year ended March 31, accelerating to 1.4 per cent in the following year, before reaching the mid-point in 2017 year as the output gap veers into positive territory in 2016.

Those expectations for low inflation feed into the Treasury's interest rate outlook, with the government's financial adviser seeing the 90-day bank bill rate, often seen as a proxy for the official cash rate, largely unchanged from the 3.6 per cent forecast in 2015 before rising to 4.3 per cent in the March 2018 year and 4.8 per cent the following year. In its December forecast, the Treasury has predicted the rate to rise to 3.9 per cent in 2016, advancing to 5.2 per cent by the end of the horizon in 2019.

Chief among the assumptions underpinning the forecast are the future path of commodity prices, New Zealand's trading partner growth, the current migration cycle and the impact of the summer drought.

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Inbound migration is seen as peaking in June 2015 with an annual net inflow of 56,600 before slowing to the long-run assumption of 12,000 by mid-2017. If inbound immigration continued to surprise on the upside, the Treasury would expect faster economic growth in the next two years as new migrants would fuel consumer spending, before putting more pressure on the housing market.

The Treasury's primary forecast is that house prices rose 6.8 per cent in the March 2015 year, and that increase is expected to slow to a 5.2 per cent pace in 2016, falling to 2 per cent in 2019.

Residential investment expansion is expected to have peaked in the March 2015 year at 13.9 per cent, slowing to 11.9 per cent in 2016, 5.3 per cent in 2017 and 4 per cent in 2018. Market investment is also seen as having peaked in the March 2015 year at 6.7 per cent, slowing to 5.4 per cent in 2016, 5.1 per cent in 2017, then 2.9 per cent and 2.4 per cent in the following years.

New Zealand's unemployment rate is expected to keep declining, and is forecast at 5.6 per cent in the March 2015 year, falling to 4.5 per cent by 2018.