By Rebecca Howard

May 30 (BusinessDesk) - New Zealand’s economic growth is initially underpinned by Finance Minister Grant Robertson’s first “well-being budget” but that growth is forecast to gradually fade. Risks - particularly international risks – remain skewed to the downside.

After an initial pop higher, growth is now forecast at 2.6 percent on average over the next five years.

Robertson remained upbeat. “While this is a lower growth rate than what we have seen in recent years, it is still well ahead of forecasts for other advanced economies, including the US, UK and Canada,” said Robertson in his budget speech. Growth in the 2015 to 2018 period was well above 3.0 percent.

Treasury forecasts show that growth in the year to June 2019 is now seen at 2.4 percent rather than the 2.9 percent forecast in the half year fiscal update as the “pace of economic expansion has lost some momentum over the second half of 2018, largely reflecting slower business investment growth and a continued easing population growth.”

GDP growth, however, is projected to rise to 3.0 percent in the year the June 2020 “supported by an increase in government spending, partly reflecting Budget 2019 decisions and stronger investment.”

According to the Treasury, spending is a cumulative $7.2 billion higher over the forecast period than indicated in the half year economic update in December.

Most of this spending relates to the expansion of new and existing government services. Government spending lifts to 4.2 percent in the year to June 2020, contributing 0.8 percentage points to economic growth in that year.

According to Robertson, the annual operating allowance in budget 2019 has been increased from $2.4 billion to $3.8 billion. The operating allowance for budget 2020 has also increased from $2.4 billion to $3.0 billion. A further $1.7 billion has also been added to the multi-year capital allowance for future budgets.

Beyond the year to June 2020, however, GDP growth gradually eases as the stimulus from higher government spending fades, population growth declines and monetary conditions tighten, Treasury said.

It expects the economy to grow 2.8 percent in the year to June 2021 and to ease to 2.4 percent in the year to June 2022 and 2.4 percent in the year to June 2023.

Those forecasts are based on the assumption that migration declines from 50,000 people in the year to June 2018 to 25,000 people in the year to June 2022 and is steady thereafter.

Net migration is now projected to add 131,000 people over the next four and a half years, which is about 50 percent lower than the prior comparative period, it said.

It notes that slowing population growth is a countervailing force for economic growth over the period as the growth in the working-age population accounted for about two-thirds of GDP growth over the three years to June 2018.

It does expect the labour market to remain tight, with the unemployment rate to decline to 4.0 percent by June 2020. Beyond 2020, employment growth eases as the stimulus from higher government spending fades and interest rates rise. It is seen at 4.3 percent in the year to 2023.

Regarding monetary policy conditions, it forecasts the 90-day bank bill rate – widely viewed as a proxy for the official cash rate – to be 1.9 percent in the year to June 2020 and to lift to 2.3 percent the following year, 2.5 percent in the year to June 2022 and 2.6 percent by the year to June 2023.

While the forecast track is lower than it was in December, it still points to rising interest rates rather than including further rate cuts. The central bank has indicated that more cuts are possible.

It said the recent move by the central bank to cut rates to a record low 1.5 percent was done after the forecasts were finalised but “does not substantially alter the Treasury’s economic outlook.”

Growth is also supported by higher terms of trade and Treasury noted “the balance of risks to the global outlook remains skewed to the downside.” These include continued trade tensions, a more pronounced slowdown in the Chinese economy and major adjustments in international financial markets.

Regarding domestic risks it said these are more balanced but include uncertainty around the impact of business confidence on investment, the extent to which capacity pressures are building and uncertainty regarding the outlook of house prices, net migration and productivity growth.

If these risks are manifested, GDP growth is seen at 2.8 percent in the year to June 2020 and then at 2.4 percent over the remainder of the period.

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