Gloom lifts but slump will take toll

Bill English. Photo / Mark Mitchell

The economy's prospects look a lot brighter in the Treasury's latest forecasts than they did when it was preparing the Budget in April, at the trough of the cycle.

But an indication of the global recession's toll is that by March 2012 real per capita GDP is expected to be nearly 6 per cent lower than forecast in the 2008 Budget.

The Treasury expects the economy to shrink 0.4 per cent in the year to March 2010, in line with the latest NZIER consensus forecasts and better than the 1.7 per cent expected in this year's Budget.

But in 2011 it is forecasting below-par 2.4 per cent growth, less that the Reserve Bank's 3.6 per cent and the consensus forecast of 2.8 per cent. Growth averages 3 per cent over the following three years.

The Treasury expects the recovery to be more gradual than previous ones because households are carrying a lot of debt, the exchange rate is impeding an export-led recovery and there are "ongoing challenges" in the finance sector.

Finance Minister Bill English said the imbalances evident in the economy before the crisis - excessive reliance on debt-fuelled consumption while the tradeables sector struggled - are not being corrected as fast as he would like.

He agreed with the Reserve Bank that banks would be more conservative so a return to a "turbo-charged" housing market was unlikely.

House prices are expected to rise 10 per cent in the year to March 2010 but that would only reverse the previous year's fall.

Confidence had rebounded but had yet to turn into decisions to spend and invest, English said.

And while New Zealand was fortunate that nearly half of its trade was with a region - Australia and east Asia - which had fared relatively well through the global recession, concerns remained about many of the other trading partners.

The unemployment rate, currently 6.5 per cent, is forecast to reach 7 per cent by March next year and stay there for the rest of the year. That is also in line with the NZIER consensus survey released yesterday.

The Budget had expected unemployment to hit 8 per cent late next year and that by next September there would be 124,000 fewer people employed than in September last year.

The cumulative loss of employment over that period is now expected to be 60,000, in part because much of the reduction in work has been taken in a cut in hours worked - by an average 3 per cent, English said.

Inflation is expected to climb from 1.7 per cent now to 2.5 per cent by next March before easing back towards 2 per cent over the following four years.

That profile includes the impact of the emissions trading scheme from the middle of next year, boosting the consumers price index by 0.4 per cent, with a similar increase in 2013 when transitional measures expire.

More inflation and more real growth mean that the "$50 billion hole" in the tax base over the three years to March 2012, which English was talking about earlier this year, has now halved.

Forecast operating deficits (excluding valuation gains and losses on the Crown's assets and liabilities) have reduced accordingly.

Not so much for the current year, where it is still $7.5 billion compared with $7.7 billion on Budget day, but for the 2010/11 fiscal year it has been cut to $6.7 billion from $9.3 billion and in the following year to $6 billion from $9.3 billion.

Over the next five years Government spending is forecast to grow a cumulative 19 per cent compared with nearly 53 per cent over the five years to June 2009.

The Government has imposed a $1.1 billion a year limit on increases in discretionary spending, but it still faces such cost drivers as population growth, the impact of inflation on superannuation and benefits, and a mounting interest bill as deficits drive debt levels higher.

GRADUAL RECOVERY
* Recovery has come earlier than forecast at Budget time but is still seen as sluggish compared with previous ones.
* The worst of the rise in unemployment is behind us, the peak now put at 7 per cent early next year, not 8 per cent late next year.
* Future budget deficits have been revised down but it will still be 2016 before surpluses return.