Trundling along

Recent data suggests that the New Zealand economy is continuing to trundle along slowly but steadily, a view that should be supported by this week's GDP figures. We expect a modest pickup in growth over the next couple of years, supported by a lift in fiscal spending that will be even larger than the Government is currently signalling.

Last week the Government released its Half-Year Economic and Fiscal Update (HYEFU). At face value, the change in the outlook since the May Budget might appear to be negative – lower GDP growth and smaller operating surpluses for the next few years. But digging into the details reveals a less concerning picture.

The Treasury was previously forecasting a sharp acceleration in GDP growth over the next couple of years, an assumption that we described at the time as ‘heroic'. The updated forecasts now see growth picking up modestly to around 3% per annum – much in line with our view and within the range of market forecasts.

While the forecasts of real GDP growth have been revised down, the Treasury has also raised its inflation forecasts. At the May Budget, inflation was forecast to remain below 2% for several more years, despite strong domestic growth. Now the Treasury is essentially expecting the Reserve Bank to meet the 2% midpoint of its inflation target consistently over the coming years. Again, this brings the Treasury more in line with market forecasts.

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