The Treasury is set to downgrade its economic growth forecasts when it releases its Pre-Election Fiscal Update (PREFU) in October, due to a weakening international situation.
But Finance Minister Bill English says stronger than expected growth in the first half of 2011 might offset that weakening outlook for New Zealand's trading partners, with the government's view being the economy was on the right track.
Concerns among New Zealand's major trading partners around slower growth, the impact of weaker public finances, and the scope and ability of authorities to react to the downturn, has led to downgrades of economic forecasts, Treasury says in its August Monthly Economic Indicators (MEI).
"Consensus forecasts of New Zealand’s trading partner growth have declined from 3.7% in 2011 and 4.4% in 2012 in April this year (the same as our Budget forecasts) to 3.1% and 4.2% (respectively) in August. Further reductions are expected in September before we finalise our forecasts for the Pre-election Update," Treasury says in the MEI.
"New Zealand’s trading partner growth is more heavily weighted to Asia and Australia than world growth; thus any downturn in developed economies would have a smaller direct impact on New Zealand through trade, even allowing for an indirect impact via Asia," it says.
"This weaker international outlook will be taken into account in our forecasts for the New Zealand economy. To some degree, it may be offset by the stronger domestic economy, but some impact on export volumes and commodity prices can be expected.
"In addition, the risks have increased since the Budget and are more heavily skewed to the downside. The volatility in markets may itself lead to lower growth through heightened uncertainty restraining investment and employment growth," Treasury says.
'We're on the right track'
Speaking to media in Parliament on Tuesday morning, English said Treasury made a reasonable point in the monthly update that the New Zealand economy was stronger than expected in the first half of this year, which might be offset by a weaker outlook for New Zealand’s major trading partners.
“We’ve yet to see how that would flow through, because our trading partner growth is focussed on China and Australia, and they’ve been doing a bit better than the UK, US and Europe,” English said.
“From our point of view we’re basically on the right track. We’re ship-shape, but the sea’s getting a bit rougher. I don’t think there’s much doubt about that,” he said.
(Updates with Finance Minister comments Tuesday morning).