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Treasury forecasting annual wage growth above 3% over next five years

Thursday 13th December 2018

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The New Zealand economy is forecast to deliver annual average wage growth of more than 3 percent a year during the next five years, although economic growth rates are seen falling gradually over that time.

The Treasury’s half-year budget and economic update, or HYEFU, shows inflation-adjusted economic growth rising from 2.7 percent in the year to June 2018 to peak at 3.1 percent in the year to June 2020 before drifting back to 2.3 percent in the June 2023 year.

Contributing to that easing in growth is an expected sharp fall in net migration from around 60,000 a year at present to around 20,000 by 2023, along with a slow increase in interest rates that will slow household consumption and investment intentions.

From 2 percent at present, the forecasts assume the 90-day bank bill rate rises to 3.2 percent by June 2023, still below the presumed ‘neutral’ rate for the economy of 4 percent, meaning monetary policy is expected to underpin growth over the forecast period.

Unemployment remains at or about 4 percent over the forecast period, while participation rates in the workforce remain high by international standards at more than 70 percent.

Over the same period, the Treasury forecasts relatively strong annual increases in hourly wages, peaking at 3.5 percent in the year to June 2021. Inflation over the five-year period is expected to be kept at the target rate of 2 percent per year.

Underpinning those wage increases are expected pay equity settlements, the negotiation of new Fair Pay Agreements under labour market reforms that have yet to be legislated, and minimum wage increases already announced.

Construction and IT sector workers will remain particularly scarce.

The current account deficit on the balance of payments remains in sustainable territory, at between 3.5 percent and 3.7 percent of gross domestic product through to June 2023, which means that the country’s total external liabilities rise from 54.6 percent of GDP to 59.6 percent of GDP.

However, there is a slow improvement in household savings rates, drifting up to show household incomes and outgoings roughly in balance by 2023.

A slightly stronger exchange rate is assumed, with the trade-weighted index rising from 73.8 in June this year to 75.2 in mid-2023.

Risks identified include the potential for international trade and political tensions to slow global growth and therefore slow down export receipts and potentially reduce commodity prices.

On the home front, the fact that the Treasury sees almost no ‘output gap’ in the next five years – i.e., that supply and demand are roughly in balance – means that the economy will struggle to grow any faster than forecast.

On the plus side, the assumed international oil price of US$60 per barrel of West Texas Intermediate Crude could turn out to be higher than what occurs, the Treasury warns.


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