BUDGET Growth tipped to peak at 3.8%
Treasury sees 2019 as high point in cycle
New Zealand’s economic growth is tipped to peak in 2019, boosted by ongoing population growth, investment, and a new family incomes package announced in Finance Minister Steven Joyce’s maiden Budget.
Growth, however, then tapers off as net migration subsides, construction growth eases and rising interest rates begin to bite.
While the economy expanded less than expected this year as exports, residential investment and business investment grew at a slower pace than anticipated, “growth is forecast to accelerate to a peak of 3.8 per cent in 2019 as investment growth gains momentum and private consumption is supported by fiscal stimulus associated with the family incomes package”, Treasury said.
The $2 billion family incomes package — which will come into play in April 2018 — is expected to benefit about 1.3 million families in New Zealand by, on average, $26 per week. Treasury expects households to spend the majority of the boost to their incomes. Overall it is “estimated to have a modest positive impact on GDP”, it said.
The Treasury also expects residential investment growth to pick up again “after a temporary pause in 2017” as rapid population growth and low interest rates fuel demand for housing, although it will ease from 2019 onwards as supply increases to meet demand, it said. House prices will rise 7.8 per cent in the year to June 2018 after increasing 5.1 per cent in the current year, according to long-run Treasury forecasts. It also expects business investment to pick up, further supporting economic growth.
It is expecting real GDP growth of 3.1 per cent in the year to June versus a prior forecast of 3.6 per cent. It now expects the economy to grow 3.5 per cent in the year to June 2018 and 3.8 per cent in the following year versus a prior forecast of 3.5 per cent and 2.9 per cent.
Population growth continues to support the economy in the short- term. According to Treasury, net migration has continued to outpace its expectations, with annual net migration rising to 71,900 in the year to March. While net migration is now expected to remain higher for longer, Treasury is tipping it to peak at 72,500 in mid-2017 before beginning to ease.
The high inflow of people means unemployment is forecast to remain flat at around 5 per cent over the year ahead, as rapid labour force growth is balanced by robust employment growth. However, it will ease to 4.3 per cent in 2020, the forecasts show.
While Treasury noted that inflation surpassed 2 per cent in early 2017 this was largely driven by temporary price movements. However, it is forecast at 2.1 per cent in the year to June 2019, as capacity pressures build, in part due to stimulus from the family incomes package, it said. This will lead to a gradual lift in interest rates.
It forecasts the 90-day bank bill to remain at 2 per cent in the year to June 2018 before gradually raising to 3.9 per cent by the year to June 2021.
Treasury forecasts the surplus will be $1.6b in the year to June 2017 versus a prior forecast of $473 million it made in December, as tax receipts have been higher than expected. However, in the following year the surplus is $2.86b versus a prior forecast of $3.34b. In the year to June 2019 the surplus is forecast to hit $4.05b versus a prior forecast of $5.4b.
—