Treasury slashes growth forecasts, lifts jobless and budget deficit outlook

Treasury has released its December Economic and Fiscal Update (DEFU), which includes a lower growth forecast and a sharp increase in the forecasts for both unemployment and the government's budget deficit. Treasury's central forecast track is for GDP production growth of 0.3% and 0.8% in the years to March of 2009 and 2010 respectively, before a rebound to 2.9% and 3.9% respectively in 2011 and 2012 respectively. It sees the unemployment rate jumping to a peak of 6.4% in 2010, which is up from a peak of 5.1% in its previous forecast. Treasury now sees the OBEGAL (Operating Balance before Extraordinary Gains and Losses) peaking at 3.1% of GDP in each of the 2011 and 2012 fiscal years, up from 1.2% and 1.5% previously. This would push up total government debt to 33.1% of GDP by 2013 from 17.5% now. Treasury said the world economy was much weaker than the budget forecasts from seven months ago and from the pre-election update. "The financial market upheaval this year represents one of the largest shocks to the world economy since World War II and the full impacts are still to work through," Treasury said. "The December Update predicts a smaller nominal economy than past forecasts. This means that forecast tax revenue is lower, leading to an increase in the size of fiscal deficits and large increases in debt." * This article was first published yesterday in our daily subscription newsletter for the banking and finance industries. The email costs NZ$365 per annum and carries exclusive news and analysis for New Zealand banking and finance industry executives, regulators and investors. Sign up for a free trial here.