The government has dodged a bullet with today’s pre-election fiscal update, or Prefu, signalling a recession has been avoided.
Treasury is forecasting average annual growth of 2.6% between 2023 and 2027, the addition of 105,000 new jobs and wages to grow faster than inflation, said finance minister Grant Robertson.
“The economy is 2.9% bigger than a year ago and close to 7% larger since the start of the pandemic in 2020. The number of people in work rose by 113,000 in the June year – 69,000 more than forecast in May’s budget,” he said.
But the projected surplus has been pushed back a year from 2026 to 2027, after several years of anticipated deficits. This year’s is expected to hit $10 billion, while next year’s deficit is expected to be $11.4 billion, up from the $7.6 billion forecast in this year’s budget. Treasury said recent tax levels had “fallen short of expectations”, which in turn lead to a weaker fiscal position.
Robertson said today’s update showed the economy was “turning a corner” but acknowledged the challenges remained real. “New Zealand continues to feel the ongoing ripples of the 1-in-100 year economic shock from the global pandemic. Earlier this year, the country also experienced its second largest natural disaster,” he said. “The economy is holding its own in an uncertain global environment.”
Meanwhile, inflation it is expected to drop down within the normal range by the end of next year. In the meantime interest rates are forecast to remain elevated.
Treasury predicted the unemployment rate would peak at 5.4% in 2025. “Slow economic growth is forecast to continue over the next eighteen months as high inflation necessitates high interest rates. Domestic inflationary pressure has remained persistent, and with ongoing domestic demand pressure, interest rates are expected to remain at their current level over the next year in order to reduce inflation,” said a statement.
“High interest rates are expected to constrain economic growth to a quarterly average of 0.4% over the next year.”