“We've got to be in a position where we can handle another recession and another earthquake and frankly we won't be there until 2020,'' Minister of Finance Bill English told a media briefing today.
“We’ve got to be in a position where we can handle another recession and another earthquake and frankly we won’t be there until 2020,’’ Minister of Finance Bill English told a media briefing today.
The briefing was to release the latest set of economic and fiscal forecasts released by the government this morning, and these show a much slower return to strong growth than was expected earlier in the year.
The Treasury has shaved a full 1% off GDP forecast for the current year – back in May the 3.2% growth was forecast for the year to March, while the expectation now is 2.2%.
A slight improvement on forecast is forecast for the 2012 year – up from 3.1% to 3.4% - but there appears no prospect of the kind of 4% + growth in GDP we usually see coming out of a recession.
Instead, a drop back to around 2.9-3% is forecast for the ensuing two years.
“There’s no doubt the year to March 2011 turned out to be more subdued than was thought in the May budget,” Finance Minister Bill English told a media briefing on the Half Yearly Economic and Fiscal Update today.
The Treasury’s forecasts are actually remarkably in line with the consensus set of forecasts by market economists released this morning by the New Zealand Institute of Economic Research.
One of the reasons for the slow return to growth remains the fact people are using any spare money to pay down debt and also that there is little appetite for new borrowing, either among businesses or households.
Business investment actually shrunk 11.4% in the year to June 2010 and is only forecast to return to 6.3% in the current financial year. A larger pickup - growth in business investment of 12.3% - is forecast for the following year but then falling away to 5.1%, 3.1% and 3.4% the following years.
That is low compared to most recoveries – there is typically a rebound in business investment of 20% or more in the recovery phase.
That is helping reduce interest rates. The Reserve Bank last week tacitly conceded the ‘neutral’ interest rate is now much lower than it was: current rates should be encouraging people to borrow but that is not happening.
The upside of this is interest rates will not have to rise as far: Mr English cited Reserve Bank data which shows a peak in the 90 day rate of around 4.5% by March 2013, compared to previous forecasts of a rise above 6% by then.
That will reduce costs in the medium term, he said.
In the meantime, the government’s own books should return to suplus by 2016, he said.
“This year was always going to see the government post the largest deficit in the current cycle,” Mr English said.
However next year would see the deficit slip to around 2.8% of GDP.
The government's Budget deficit has blown out to $11.1 billion or 5.5 per cent of gross domestic product That is above the 4.2% forecast in the May Budget.
The cash deficit has also blown out, from a forecast $13.3 billion in May to $15.6 billion (7.7% of GDP) before falling to $4.9 billion in the June 2015 year. Overall, cash deficits total $44.4b over the next five years.
