Tax cut allowance intact for 2017, Super Fund top-ups pushed out 2 years

New Zealand economic growth may be below previous forecast in the next two years, slowing the pace of government debt repayments and delaying the resumption of Crown top-ups to the NZ Superannuation Fund, the half-year budget update shows.

However, the 2016 Budget Policy Statement shows the government still intends to make $2.5 billion available in its 2017 election budget, which may be used in part for tax cuts, "if economic and fiscal conditions allow".

"Contributions to the New Zealand Super Fund are projected to resume in 2022/23," the BPS says, some two years later than previously indicated.

The BPS forecasts show the economy slowing from 3.2 percent inflation-adjusted growth in the year to March 2015 to 2.1 percent in the March 2016 year, reflecting a weak start to the current year and a pick-up in the second half.

However, the growth picture over the whole five year forecast period is weaker in the short term and stronger in the long term than the May budget forecasts, which are replaced by today's half year fiscal and economic update. As a result, the total size of the economy in five years' time is forecast to be $17 billion smaller than previously forecast, which flows straight through to a lower forecast tax take.

Growth is seen rising to 2.4 percent in the year to March 2017 ahead of an expected growth spurt in the 12 month period that would cover a late 2017 general election, with 3.6 percent real growth in the March 2018 year.

Average annual growth over the five year forecast is 2.7 percent, slightly weaker than the forecasts released last week by the Reserve Bank of New Zealand in its quarterly monetary policy statement.

While the impact of an El Nino drought on both agricultural and hydro-electric output is hard to forecast, the Treasury is predicting "a small negative impact," the Treasury Secretary, Gabriel Makhlouf, said, in contrast with El Nino's treatment as no more than a potential source of risk to growth by other forecasters.

However, that impact was expected to be below the 0.6 percent of GDP impact identified as the likely impact of El Ninos on New Zealand by the International Monetary Fund and less than the 0.7 percent impact of the 2013 drought.

That said, global dairy prices are not seen returning to US$3,000 per tonne until 2017, although the recent sharp decline in the terms of trade starts reversing in 2016 and service exports - particularly tourism and foreign students studying in New Zealand - will help underpin growth.

Unemployment is forecast to peak at 6.5 percent in the year to March 2016 and does not fall below 5 percent before the March 2019 year, when it is forecast to fall to 4.7 percent. Those forecasts assume that the recent record levels of record migration peak in the March quarter next year before returning to the long run average net inflow of 12,000 a year by March 2018.

The near-term unemployment rate was "higher than we would want to see and disappointing given earlier forecasts of a declining rate", said Finance Minister Bill English, in part reflecting strong immigration and slower economic growth.

However, job creation remained the third strongest in the OECD 'rich countries' club' and participation in the labour market in New Zealand remains the highest in the OECD, he said.

The so-called 'non-accelerating inflation rate of unemployment" is estimated to be around 4.5 percent by the end of the five year forecasts and the 'neutral' interest rate for monetary policy purposes is assumed to have fallen a little below 4.5 percent.

No further cuts to interest rates are forecast beyond the 25 basis point cut announced by the RBNZ last week, and the 90 day interest rate is seen rising from 2.6 percent to 3.4 percent in the year to March 2018, a year earlier than the central bank's forecasts last week.

While annual inflation doesn't reach the target rate of 2 percent until March 2017, English said he was satisfied the Reserve Bank was "trying pretty hard" to reach its inflation target through a period of unusually low global inflation.

The balance of payments deficit on current account is forecast to peak at 6 percent of Gross Domestic Product in the March 2017 year.

The forecasts assume global oil prices remain below US$70 a barrel throughout the forecast period to March 2020.

The update also presents both a more optimistic and pessimistic scenario for the growth outlook, with the lower growth scenario including warnings that attempts to boost economic growth through loose monetary policy may not be working as well as it has in the past.

"If businesses and consumers are less sensitive to monetary policy than in the past, it would lead to a smaller boost to investment and consumption growth from low interest rates than in the central forecast."

Productivity growth might also occur as a result of so-called 'secular stagnation', created by a combination of low inflation, interest rates and economic growth.

The downside scenario also warns that the contribution to growth of the Canterbury rebuild may be smaller than forecast.

"The residential rebuild appears to have peaked, earlier than previously forecast, and uncertainty persists over the total size of the residential rebuild."

(BusinessDesk)