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NZ government sees economy on faster track on Christchurch rebuild, migration, commodities

Tuesday 17th December 2013

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The government raised its forecast track for economic growth versus the 2013 Budget, saying the Christchurch rebuild, an improving labour market, migrant inflows and booming export commodities will make up for weaker trading partner growth.

Gross domestic product will accelerate to 2.7 percent in the year ending March 31, 2014, before peaking at 3.6 percent in 2015, up from the Treasury's May forecasts of 2.4 percent and 3 percent respectively, according to the Half Year Economic and Fiscal Update. Growth slows to 2.7 percent, 2 percent and 2.2 percent in 2016 through 2018.

The Treasury's latest forecasts are a tad rosier than those released last week by the Reserve Bank, which had GDP peaking at 3 percent in 2015, though the message is similar to the bank's language of "considerable momentum" in the economy, terms of trade at a 40-year high and rising household spending and construction activity.

"The near-term outlook for the New Zealand economy is robust, with an increasingly embedded and broad-based pickup in activity anticipated following a drought-affected first half of 2013," the Treasury said. "In sum, the economy is expected to be operating at, or above capacity over most of the forecast period."

Evidence has piled up that the New Zealand economy is picking up pace, including strong business and consumer confidence, elevated prices for dairy products, increased consumer spending and inbound net migration at a decade-high. Construction, retail and hospitality firms led a 1.2 percent jump in employment in the third quarter.

The Treasury sees employment growth rising to 2 percent in the March 2014 year from its Budget forecast of 1.5 percent, while unemployment recedes to 5.8 percent from the earlier estimate of 6 percent. It has nominal wages rising 3.1 percent in 2015 and 3.2 percent the following year, from 2.2 percent and 2.8 percent respectively in the Budget.

"Having shown signs of improvement over the past year, the labour market is expected to strengthen further over the forecast period," the Treasury said. "The Canterbury rebuild will be a large contributor to the strengthening in the near term, along with rising activity in the Auckland region" partly helped by the inflow of migrants.

Net migrant inflow has been about 26,000 higher than the government was expecting back in May.

The Treasury lifted its track for private sector consumption, saying that rising house prices and more certainty over the outlook for the economy had led to its assumption that households "are broadly comfortable" with their amount of debt reduction in recent years as a share of income.

Still, a cautious mentality is expected to endure, with increases in consumption likely to be led by rising incomes rather than being funded from debt.

The Treasury echoed signals from the Reserve Bank that borrowing costs are set to rise next year as the bank looks to contain emerging inflationary pressures in the economy.

It raised its forecast for the track of inflation starting in 2015, when it sees the consumer price index rising to 2.4 percent, above the mid-point of the Reserve Bank's 1 percent to 3 percent target range. That's higher than the central bank's own forecast of 1.7 percent.

The Treasury lowered its forecast track for trading partner growth to 3.2 percent in calendar 2013 and 3.6 percent in 2014, from the Budget's 3.4 percent and 3.8 percent respectively.

The biggest revision comes from a lower pace of growth in Australia, which it said reflects a rebalancing away from investment and toward consumption, residential investment and exports. Still, Asian economies, paced by China, are expected to underpin strong demand for the nation's commodities over the medium term, it said.

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