Budget Policy Statement

ECONOMIC AND FISCAL FORECASTS

Economic outlook and forecasts

The Government's actions to grow the economy and support Kiwis mean New Zealand is well positioned to face the global economic slowdown currently underway.

In real terms the economy was 4.8 per cent larger in June 2022 than it was pre-COVID-19. The Treasury's HYEFU 2022 forecasts are for the economy to grow by a further 11.2 per cent across the forecast period – an average of 2.1 per cent per year – off the back of the strong foundations that the Government has been building under our economic plan.

Figure 4 - Real GDP growth (indexed to Q4 2019)

Source: The Treasury

Over the medium to long term, New Zealand's economic prospects will be supported by a range of factors, including a growing skilled workforce, a shift towards the digital and high-tech economy, investment in transforming industries under our economic plan, and benefits to our exporters flowing from the six new trade agreements or upgrades signed by the Government since 2017.

In the shorter term, the economic outlook will fluctuate slightly as the Reserve Bank acts to reduce inflation pressure over 2023, and as the global downturn affects confidence and activity around the world. The Treasury is forecasting a period in 2023 where growth will slow and fall slightly across three quarters. GDP is expected to decline by 0.8 per cent in the 2023 calendar year, to sit just above its June 2022 level.

New Zealand will enter the shallow slowdown from a stronger starting point than many of the countries to which we compare ourselves. Ahead of the 0.8 per cent forecast drop, the Treasury expects real GDP will have increased by 1.8 per cent across the second half of 2022. This growth provides a buffer ahead of the shallow forecast slowdown.

Real GDP at the end of 2022 is forecast to be 6.8 per cent higher than before the COVID-19 pandemic. Economic activity is expected to remain more than 5.9 per cent above pre-COVID-19 levels through 2023. By 2027, the economy is forecast to be 16.6 per cent larger than it was in December 2019, adjusted for inflation.

Unemployment is at historically low levels at 3.3 per cent. While this has put pressure on businesses and wages, it has meant that many groups that have often been on the fringes of the labour market have entered employment at greater rates than at any time in recent decades, providing social and economic benefits for New Zealand. The Treasury's forecast shows unemployment rising to 5.5 per cent in mid-2024, as a result of the global slowdown and actions to reduce inflation.

The Reserve Bank's efforts to reduce demand and return inflation to its target range mean that many households will face increasing mortgage rates in the coming months, with an associated decline in consumer spending and investment. The Treasury forecasts that wages are set to rise faster than inflation every year across the forecast period, providing further support for households.

The significant tightening of monetary policy is coming at a time when global growth in 2023 is likely to be the lowest since the early 1990s, outside of the COVID-19 pandemic and Global Financial Crisis. The global outlook is highly uncertain and will depend on the effectiveness of central banks’ monetary policy tightening and the absence of further negative shocks.

Table 3 - Summary of the Treasury's Half Year Update economic forecasts