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Pre-Election Economic & Fiscal Update 1999 |
Executive Summary (continued)Summary of Treasurys Pre-election Economic and Fiscal ForecastsThis summary sets out the economic and fiscal outlook for the next three years. A number of risks to the outlook may lead to a significant change in the growth path. Scenarios for higher and lower than forecast growth provide illustration. The Economic OutlookSteady export-led growth on the back of a positive world outlook.Figure 1 GDP growth Sources: Statistics New Zealand, The Treasury Despite contracting in the June 1999 quarter, the economy is set for solid expansion with quarterly growth expected to run somewhat above trend over the early part of the forecast period. Annual average growth is expected to be around 2½% in the year to March 2000, 3½% in the following two years, and 3% in the final year of the forecast period. Conditions for growth remain positive. Stronger world demand and a more competitive exchange rate mean exports now count for a greater proportion of growth than at Budget time - although overall growth in the out years remains little changed. Figure 2 Trading partner growth Sources: Consensus Forecasts Inc, The Treasury Global growth prospects have improved through this year. Trading partner growth is now expected to be 3% in both 1999 and 2000. For 1999 this marks a doubling on the growth expected at the start of the year. Monetary conditions also remain stimulatory with low interest rates and a competitive exchange rate. Robust growth in manufactured exports and tourism activity is expected to continue, underpinned by stronger global demand and a competitive exchange rate. The Americas Cup and the Sydney Olympics give an additional boost to the tourism sector. Commodity exporters are expected to shake off the effects of the droughts and gain from recovering world commodity prices. Boost from strengthening labour market partly offset by price and debt pressures.Figure 3 Employment and unemployment Sources: Statistics New Zealand, The Treasury Household spending is supported by steady employment and wage growth. Firms are expected to lift their demand for staff in line with a steadily growing economy. Employment growth peaks at an annual 2.7% in 2001. The unemployment rate falls to below 6% in 2001/02. Incomes receive an additional fillip in the March 2001 year from the planned tax cuts. Figure 4 Household debt and debt servicing Sources: Statistics New Zealand, The Treasury However, in the near term households feel the pressure of rising oil prices. Over the medium-term, increasing debt levels and rising debt servicing costs see spending growth slow and savings modestly rebuilt. Modest tightening in monetary conditions.The economy is likely to run into capacity constraints by around late 2000. However, a modest monetary tightening wards off inflationary pressures. This keeps the economy on a sustainable growth path. Figure 5 Consumers price index excluding credit services Sources: Statistics New Zealand, The Treasury Short-term interest rates are forecast to climb to 7.0% by the 2002 year and the exchange rate is expected to show a modest rise. The continuing large current account deficit is assumed to limit the rise in the exchange rate. Rising oil prices are largely behind a spike in annual inflation to 2.7% in the year to March 2000. This is not, however, expected to lead to more sustained inflationary pressures. Figure 6 Current account Sources: Statistics New Zealand, The Treasury In the near term, the oil price rise and some one-off large imports, such as a frigate, and higher returns to foreign direct investment in New Zealand, see the current account deficit increase to 8.3% of GDP. That is expected to improve over the forecast horizon, falling to 5.8% of GDP by the end of the period. The Fiscal OutlookOperating balance grows with revenue growth outpacing expense growth.Figure 7 Operating balance Source: The Treasury The 1998/99 operating balance of $1.8 billion was boosted by large one-off items including gains on sale of assets. Excluding the one-off items, the operating balance was around $150 million. The 1999/2000 operating balance of $14 million reflects:
These effects are partly offset by:
Beyond 1999/2000 the operating balance rises, with revenue growth (averaging 4.8% a year) outpacing expense growth (averaging 2.8% a year). As a percentage of GDP, expenses fall between 1999/2000 and 2002/03 from 35% to 33%. Figure 8 Expenses ($ and % of GDP) Source: The Treasury In dollar terms, over the same period, expenses increase from $36 billion to $39 billion reflecting:
Net debt is stable in dollar terms, but falls as a percentage of GDP, over the forecast period.Figure 9 Net debt (% of GDP and $) Source: The Treasury In 1998/99 net debt was $21.7 billion. Net debt rises in 1999/2000 and 2000/01 before falling to slightly below its 1998/99 level. The rise reflects:
Improving operating cash-flows drive the fall in 2001/02 and 2002/03. As a percentage of GDP net debt falls from 21.8% to 17.8% between 1998/99 and 2002/03 as nominal GDP grows. Net worth grows over the forecast period.Figure 10 Net worth Source: The Treasury In 1998/99 net worth fell from $10 billion to $6 billion. The fall reflects ARCICs recognition of the future cost of already accepted ACC claims ($6.1 billion), partly offset by a $1.8 billion operating surplus. Beyond 1999/2000, net worth increases in line with operating balance surpluses. Compared to Budget, the operating balance is largely unchanged, but net debt and net worth improve.The operating balance forecasts are largely unchanged from the Budget. The balance is $50 million higher in 1999/2000, $6 million higher in 2000/01 and $155 million higher 2001/02, reflecting:
These effects are largely offset by:
Net worth forecasts, however, are stronger by between $650 million and $830 million over the forecast period largely reflecting the lower ACC outstanding claims liability valuation at 30 June 1999. Net debt forecasts are lower by between $100 and $300 million. These improvements largely reflect a better starting position in 1998/99 than forecast in the Budget and stronger dividend flows from SOEs in 1999/2000. Risks and ScenariosThe Central Forecast embodies a steady export-led expansion. As always there are risks and uncertainties surrounding this central track, raising the prospect of the economy following quite different growth paths to that presented here. Stronger world growth, for example, could see additional strength in our economy over the first part of the forecast period. The economy would hit capacity constraints sooner, producing a sharper cycle than forecast. Figure 11 Real GDP growth Sources: Statistics New Zealand, The Treasury But there are also risks around the sustainability of the current global recovery: most prominently, the possibility of a sharp correction in equity prices in the US. Slower world growth would undermine the strength of New Zealands recovery leading to a more modest growth path than envisaged here. There are also risks associated with the domestic economy. The June quarter GDP outturn has raised the possibility of some near term weakness. Over the medium term it is by no means certain how consumers will react to higher debt. If any of these circumstances were to develop differently than allowed for in the Central Forecast, they could produce outcomes where economic growth is stronger or weaker than embodied in the Central Forecast. This would have flow on effects for the fiscal forecasts. Examples of a high growth (Stronger World Economy) scenario and a low growth (Weaker World and Household Sector) scenario help illustrate some of these risks. Figure 12 Operating balance Source: The Treasury Alternative economic scenarios lead to alternative fiscal outcomes, mainly because of differences in the outlook for nominal GDP, a key driver of tax revenue. The Stronger World Economy scenario leads to a stronger operating balance throughout the forecast period. In contrast, the Weaker World and Household Sector scenario sees the operating balance record modest deficits in the first two years of the forecast period, but return to surplus over the final two years. Economic Outlook[1]
Fiscal Outlook[1]
Sources: Statistics New Zealand, The Treasury Notes: 1. Economic projections were finalised on 1 October, fiscal projections on 11 October 1999. 2. Percentage of the labour force, March quarter, seasonally adjusted. 3. Quarterly average. 4. Annual percentage change, March quarter. 5. CPIX refers to the Consumer Price Index excluding credit services. | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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