Treasury updates half-yearly forecasts – books are in better shape

New Zealand’s economic outlook is much brighter than forecast in September, with growth forecast to be stronger, unemployment lower and operating deficits slimmer.

At Treasury’s half-yearly opening of the books, unemployment is forecast to peak at 6.9 per cent by the end of 2021, compared to 7.8 per cent in September’s pre-election fiscal and economic update (Prefu).

Tax revenue is forecast to be $16.8 billion higher over the forecast period – to 2025 – than forecast in Prefu.

Obegal deficits (excluding gains and losses) across the forecast period are all lower, including the current financial year with a $21 billion deficit forecast – which is $10 billion less than forecast in September.

Gdp is forecast to grow by 1.5 per cent in June 2021 year compared with a contraction of 0.5 per cent forecast 0.5 in Prefu.

Finance Minister Grant Robertson welcomed the improvements, saying the Government’s decision to act quickly in response to the global Covid-9 pandemic had contributed to a better-than-expected economic recovery.

While the economy had contracted this year, it was forecast to rebound strongly in 2021, outperforming regions such as the Euro Zone, Britain and Japan.

“Global economic activity is expected to continue to recover over the rest of the forecast period, although the pace of recovery is likely to be uneven as countries contend with renewed virus outbreaks and the resulting containment measures,” he said.

“Of course the pandemic is not the only risk to the global outlook,” Robertson said.

“Ongoing trade and geopolitical tensions, in particular tensions between China and the United States, have the capacity to affect growth and lead to higher levels of volatility.”

Treasury’s forecasts are based on a set of assumptions and it forecasts house prices to rise by 8.5 per cent in the current year to June 2021,4.5 per cent in the following year, then by 5.2 per cent for two years and then 5.5 per cent.

Robertson, who is reviewing settings around housing, said he had received advice from the Treasury and the Reserve Bank as requested and expected to make announcements in the New Year.

He supported “sustained moderation” in house price inflation.

“What we cannot accept are 15 to 20 per cent increases on an annual basis.”

Core Crown Debt in Treasury’s official forecasts is set to peak at 52 per cent of Gdp or $190 billion by 2024 – 2025- which is lower than the 55.3 per cent in Prefu.

But when the effects of the Reserve Bank’s Funding for Lending (FLP) programme to domestic banks are taken out (which is counted in additional borrowing and not ) net core Crown debt, the picture is better and actually peaks at 45.6 per cent of Gdp in 2023 – 2024 or $174 billion.

The June quarter Gdp contraction of 12.2 per cent was the largest on record, which was lower than the 16 per cent forecast by Treasury.

The lastest Gdp figures for the September quarter are due out tomorrow.

Secretary of Treasury Caralee McLiesh said the lower levels of forecast unemployment could be attributed to amount of fiscal support for the Wage Subsidy Scheme “which was really successful in keeping people attached to the workforce.”

She said unemployment disproportionately affected women, Maori, Pacifica, youth and Aucklanders.

About $14 billion has been paid in the wage subsidy, to support about 1.8 million jobs.

Of the Government’s$62 billion Covid Response fund, $51.8 billion has been spent, leaving about $10.3 billion to address any resurgence.

Even though Robertson welcomed a lower peak of unemployment of 6.9 per cent, “that is still a lot of people losing their jobs.”

The cut-off for the HYEFU forecasts was November 13 and Robertson said that the roll-out of vaccines around the world since then was cause for optimism.

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