Further confirmation that the New Zealand economy is making its way from recession faster than expected.
Last week the central bank Governor, Dr Alan Bollard advanced the timing of the first rate rise from late next year to midway through 2010.
Yesterday the NZ Treasury forecast the economy will grow faster than previously expected, after a contraction that is proving to be less painful than forecast in the year to March 2010.
The contraction this year is now expected to be 0.4%, significantly better than the 1.7% slump forecast back in May.
Rising demand for commodities (timber and dairy), plus rising immigration and higher house prices, have helped boost the economy.
The better recoveries in Australia and China have helped.
Gross domestic product (GDP) will increase 2.4% in the year to March 2011 (starting April 1, 2010) and 3.2% in the following year, according to the Treasury forecast.
"The economic environment presented in this Half Year Update is stronger than predicted in Budget 2009, which means the Crown’s fiscal deficits are expected to be smaller than anticipated earlier in the year," the Treasury said.
It warned however than as the recovery emerged, many of the faults in the NZ economy would re-emerge after being hidden by the slump.
"The broad economic and fiscal challenges presented in the Budget persist.
"Imbalances in the economy are likely to return to the fore as domestic demand leads an anticipated upturn, while ongoing fiscal deficits are expected to push government debt levels significantly higher in the years ahead.
"The heightened uncertainty surrounding the outlook for the world economy has diminished in recent months, but a degree of uncertainty remains.
"A gradual recovery in the economy is now expected to be led initially by domestic demand rather than be export volume-led.
"After a 0.4% contraction in the March 2010 year, real GDP is forecast to rise 2.4% in the March 2011 year owing to higher consumer spending and a recovery in residential investment.
"Growth is forecast to accelerate to 3.2% in the March 2012 year owing to higher export volumes as the exchange rate is projected to fall, and the Rugby World Cup and stronger world growth boost tourism.
"Price inflation, combined with stronger real activity, is forecast to lift growth in nominal GDP from 1.7% in the March 2010 year to around 5% per annum for the rest of the forecast period.
"Over the four years to June 2013 as a whole, nominal GDP is predicted to be $NZ44 billion or nearly 6% higher than expected at Budget 2009, of which a little under half reflects the impact of higher prices, including both higher terms of trade and domestic inflation," the Treasury said.
The budget deficit won’t be as large as previous forecast in the May budget.
The cash deficit will widen to $NZ11.35 billion in the year to June 30, 2011, and then start narrowing.
In May, the deficit was projected to widen to $NZ12.52 billion.
The government says the budget could be back in deficit in 2016, seven years after it went into deficit for the first time in nine years.
New Zealand’s economy grew for the first time in six quarters in the three months ended June 30, earlier than the expected.
The report saw the Kiwi dollar trade around 72.70 US cents.
It remains up 15% against the US dollar the past six months.
The jobless rate will peak at 7% early next year, down from the previous estimate of 8%.
In May, the NZ government deferred income tax cuts planned for 2010 and 2011 which were promised during last year’s election, and suspended payments to the nation’s pension plan to control debt.
Gross sovereign debt is forecast to rise to 36% of GDP by 2013 compared with 24.1% in the year to June this year.
The Treasury said that the stronger economy is expected to lead to more tax revenue over the forecast period as a whole.
"However, the initial recovery in tax revenue is expected to be muted by a lower starting position and by lags between economic activity and tax revenue, both of which are associated with business income tax.
"The recent recession led to declining profits and larger losses among firms than were expected at Budget.
"This accumulation of tax losses will likely hinder growth in income tax paid by firms in the recovery.
"Tax revenue is forecast to be $400 million lower than expected at Budget in the June 2010 year.
"With growth in PAYE and GST, tax revenue is forecast to be higher than previously expected in the following four June years."
