Economic growth expected to hit new high

Unemployment is forecast to continue falling from 6 per cent in the year to March 2014 to 5.4 per cent by next March and 4.5 per cent in March 2019. Photo / Herald on Sunday

Economic growth is expected to average a historically high annual rate of 2.8 per cent over the next five years, although growth will peak in the year to March 2015 at a slightly lower level than was forecast in the budget in May, the government's half year economic and fiscal update says.

Lower than expected inflation means the nominal value of economic activity will be lower, reducing forecast government tax revenues and removing the forecast budget surplus for the year to June 2015.

But it also means the annual average potential growth rate while keeping inflation stable has been raised to 2.4 per cent in the current financial year, peaking at 2.9 per cent in mid-2016, before falling back to 2.3 per cent by the end of the forecast period, in 2019.

Forecast growth in the next three March years are 3.5 per cent, 3.4 per cent and 2.8 per cent respectively, before the impact of possible tax cuts that today's Budget Policy Statement signalled will be in prospect in the election year budget in 2017. By March 2019, annual economic growth is expected to have fallen back to 2.2 per cent.

"New Zealand is performing pretty well in a world that remains uncertain," said Finance Minister Bill English in a briefing to media accompanying the publication of the HYEFU and BPS at the Treasury.

Unemployment is forecast to continue falling from 6 per cent in the year to March 2014 to 5.4 per cent by next March and 4.5 per cent in March 2019. Labour force participation rates remain elevated compared to other developed economies at around 68.8 per cent, despite strong ongoing net inward migration that is seen peaking in the year to March 2015 at a net 52,400 new arrivals.

The Treasury forecasts assume a considerably stronger New Zealand dollar than forecasts in the Reserve Bank of New Zealand's monetary policy statement last week, with the trade-weighted index forecast at 76.6 in March 2017, compared with the RBNZ's forecast of 73.6.

It sees some increase in interest rates to a 90 day bill rate of 4.4 per cent in March 2017, roughly the same as the 4.5 per cent forecast from the central bank.

"Recent unexpected falls in oil prices (are) expected to lower tradable inflation," the HYEFU economic commentary says.

While nominal wages are forecast to grow faster than inflation at 2.8 per cent a year for the next two years, the forecasts assume a slight fall in average hours worked per week from 33.5 to 33.2 hours while annual labour productivity is forecast to grow by 1.3 per cent annually.

With lower export receipts, especially from dairy products, the domestic consumption and new business investment are expected to be a larger contributor to the growth outlook than previously expected.

Growth in construction activity starts to ease from the 17 per cent growth seen in the year to March this year to 15.3 per cent, 12.2 per cent and 4.5 per cent over the years to March 2015, 2016 and 2017 respectively.

House price inflation is presumed to have peaked in the year to March 2014 and is forecast at 4.5 per cent and 3.9 per cent over the next two years. The consumers price index is forecast to sit at or about the 2 per cent annual target rate in 2016 and 2017.

The balance of payments deficit is affected by the lower track for export receipts, rising from 2.7 per cent of gross domestic product in the March 2014 year to peak at 6.2 per cent in March 2016, before falling back to 5.9 per cent of GDP by March 2019. If, however, the terms of trade prove to be weaker for longer than forecast, the Treasury forecasts a scenario where the current account could blow out to close to 8 per cent of GDP over the next two years.

Read the full Treasury report here: