Treasury’s GDP forecasts rise against dank global backdrop

The biggest surprise in today’s pre-election economic update is that GDP outlook is better than in the budget.

There is more than a whiff, however, that the Treasury’s economic boffins do not quite believe this themselves.

The pre-election economic and fiscal update (PREFU), released this afternoon, shows the government on track to return to surplus in 2014/15, and to begin repaying debt from that point.

All that was signalled previously by Finance Minister Bill English. 

The Treasury’s growth forecasts – which some (although not this newspaper) were predicting would be worse than in the budget – actually show 1% better GDP than was expected in the May budget.

Over the four years to 2015, the Treasury is forecasting total GDP growth of 13.5%.  That is up on budget forecasts of 12.5% over the same period.

Partly this is because the forecasts for the current calendar year turned out to be too pessimistic:  the year to June saw GDP of 1.6%, when the Treasury was expecting 1%.

Growth for the current year is also expected to be better, up from 1.8% to 2.3%. The follow three years have also seen shifts: 3.4% (was 4%); 3.3% (was 3%); and 2.9% (was 2.7%).

All this is against a backdrop of world economic upheaval and forecasts of lower growth for New Zealand’s trading partners.

And despite the better GDP outlook, there is a distinct air of gloom around the latest update.

Usually – as with budgets - the pre election update includes a main or central forecast, as well as an “upside” and a “downside” scenario.

This year, the upside scenario has been removed. The downside scenario, though, is very much present, and Treasury secretary Gabriel Makhlouf took analysts and media through this scenario carefully in this afternoon’s briefing.

This includes lower trading partner growth causing up to a 10% fall in commodity prices; higher unemployment; households stacking even more of their disposable income into either paying off debt or into savings; higher unemployment; and a global shock causing a similar bank funding crisis to that of 2008-09 – and with the combination of these causing less government revenue and higher spending – and higher debt.

But overall, he told the briefing, “Each of the judgments are subject to a lot of risk”.

Finance Minister Bill English said some of the forecasts were a bit on the pessimistic side.

“The Europeans might go completely off their nuts and do something stupid next week but I think that’s a relatively low risk,” he said.