Treasury cuts NZ economic growth forecasts due to Euro crisis; GDP growth in yr to March 2013 closer to 3% than 3.4% forecast in PREFU

Prime Minister John Key is still musing about returning the government's books to surplus a year earlier than forecast, despite a worsening European sovereign debt crisis today forcing Treasury to cut the growth forecasts for New Zealand's economy that it gave in its pre-election update (PREFU).

The cut to Treasury's GDP forecasts for the year to March 2013 from 3.4% to closer to 3%, as well as for subsequent years, came after figures showed showed the government's deficit in the four months to October 31 was 4.1% worse than forecast in the PREFU, which was released on October 25.

In the PREFU document, Treasury warned of key risks stemming from the European crisis, which could lead to downward revisions of its forecasts. Finance Minister Bill English this morning said the outlook for the European situation had deteriorated since the PREFU, but that the government was still committed to returning the books from a deficit of NZ$18.4 billion in the year to June 2011 to a forecast surplus of NZ$1.45 billion in 2014/15.

English pointed to higher-than-expected corporate tax revenue in the four months to October as a bright spot among the figures. Key later on Monday pointed to the latest fall in unemployment in the United States as a reason to be optimistic about the global situation, and ventured to repeat his desire to return the books to surplus in 2013/14, a year before Treasury's forecast.

However both noted there could be difficulties which could lead to tighter government spending in order to reach surplus in 2014/15, given the complexity and size of European situation.

Forecasts revised down

In its latest monthly economic indicators released on Monday afternoon, Treasury said PREFU assumed that European governments would manage the crisis without too much more damage to the real economy. However, "financial tensions have escalated and dragged down growth forecasts in the region and across our major trading partners."

"Although the outlook is still well above the indicative downside scenario outlined in PREFU, it has weakened to the extent that we now expect New Zealand’s economic growth in the year ending March 2013 to be closer to 3% than the 3.4% we had forecast in the Pre-election Update," Treasury said.

"It is likely that growth will also be lower in subsequent years, but it is too early to judge how material those impacts might be.  We continue to expect the Canterbury rebuild to begin in earnest in the second half of 2012 and to provide an offset to global weakness. 

"Easier monetary conditions, through a lower exchange rate and a potential delay to the start of expected rises in the Official Cash Rate, will also provide some offset to a weaker world economy," it said.

"In the PREFU we noted that in the downside scenario tax revenue would be around NZ$14.5 billion lower across the four-year forecast period. Although we are still well away from the downside scenario, global economic risks have increased the chances of a downgrade to our revenue forecasts when the Treasury publishes its 2012 Budget Economic and Fiscal Update."

Still reasons to be optimistic

On Monday afternoon, while announcing a coalition deal with the ACT Party, Prime Minister John Key told media the downward revisions followed a similar move by the OECD, with the changes “at the margins”.

“They’re forecasts, so let’s see how it ultimately goes, but it’s not overly dramatic," Key said.

“Forecasts are wonderful things and they are a prediction of what may or may not occur. We’re the government, and so therefore we’ll get on and run the operation as best we can. That means being careful with how we spend money, it means trying to promote economic growth.

"Over the weekend you saw the US unemployment numbers dramatically improving, they’ve created quite a lot of jobs there in the last couple of months. Yes, it might all go to hell in a handbasket. If it does, we’ll manage it. But at the moment we’re a little bit more confident than others,” Key said.

“At the end of the day, if there’s some catastrophe in Europe and the place melts down, that changes the global economic outlook, there are always things that are beyond our control. But we are totally committed to trying to get back to surplus."

The year earlier – 2013/14 – Treasury was predicting a “very small deficit” before the books returned to surplus.

“In my view it’s still possible that we can get back to surplus that year,” Key said.

If things really went badly, the government had already indacated the first port of call in terms of a fiscal response was cutting the NZ$800 million new budget spending earmarked for the 2012 Budget.

Treasury is set to release a Budget Policy Statement, with some form of forecasts, in February. See last week’s article: No December update from Treasury for incoming govt due to PREFU; Incoming 2008 govt asked for one due to Lehman collapse, global turmoil.

(Updates with background, links, comments and video of reaction from PM John Key)