Treasury warns on forecast risks

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The outlook for the global economy has eased slightly since Treasury finalised its Budget forecasts in April, Acting Secretary to the Treasury Gabriel Makhlouf says.

In speech notes released on Thursday morning, Makhlouf, who was deputy chief executive under just-departed Secretary John Whitehead, said the international economy remained a source of potential downside to New Zealand's economic recovery.

"While there are signs the global economy is recovering, there have been some set-backs recently," Maklhouf said in a speech to the New Zealand Institute of International Affairs.

"The recovery is being driven by emerging economies, in particular China and other Asian countries, and there are some additional benefits for New Zealand via Australia. Activity in the major developed economies has been slower to rebound as they were more directly affected by the global crisis and their economic challenges are more entrenched," Maklhouf said.

"Temporary shocks have also adversely affected economic activity, in particular the Queensland floods in Australia and the earthquake in Japan. These events are expected to reduce growth in the short term - today Australia reported a 1.2 per cent fall in GDP in the first three months of this year - but rebuilding in both countries will boost it subsequently," he said.

Notwithstanding the positive headline picture, there remained an elevated level of risk around global growth.

"While there are some upsides, on balance the risks are weighted to the downside for the forecast period as a whole," Maklhouf said.

"As a result, the international economy remains a source of potential 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," he said.

There was also the possibility of higher food and fuel prices eroding disposable incomes, especially in developing economies.

"What can be said is that the global recovery is more assured than it was in 2010 as the recovery has become more strongly established," Maklhouf said.

"Since Treasury finalised its economic forecasts for the Budget in mid-April, the outlook for the global economy has eased slightly with weaker data reported in the United States and in China, leading to a modest correction in some commodity prices. Concerns about euro area sovereign debt have intensified again," he said.

"In our Budget forecasts we developed a scenario in which rising consumer prices and monetary tightening, especially in developing countries, bring a slowdown in world growth, though we are still a long way from such a scenario.

"My last comment on this is that the chief challenges for policy-makers in this environment are the timely withdrawal of monetary and fiscal stimulus in such a way as to support growth and manage emerging inflation pressures, especially in developing economies. Little has been done so far to reduce global imbalances between high-savings, low-consumption economies (such as China) and heavily-indebted, high consumption economies (such as the United States)," Maklhouf said.

- INTEREST.CO.NZ