sign uplog in
Want to go ad-free? Find out how, here.

Latest Euro turmoil, commodity price and NZ$ falls right at the wrong time for Treasury and its Budget 2012 forecasts

Latest Euro turmoil, commodity price and NZ$ falls right at the wrong time for Treasury and its Budget 2012 forecasts

By Alex Tarrant

Renewed turmoil in Europe over recent weeks appears to have come right at the wrong time for Treasury, which over the past couple of months has been cautiously readying its latest set of forecasts for next Thursday's Budget.

The economic forecasts contained in the Budget are generally finalised at least a month ahead of being released. Last year, tax revenue forecasts got an extra week on their economic counterparts (which were finalised 36 days before release), while the government's fiscal forecasts were finalised 17 days before Budget day. The Budget's text was finalised eight days before release.

So with this year's Budget to be released on May 24, Treasury is expected to have finalised its economic forecasts before the Greek elections on May 6, which failed to produce a government, and before French voters rejected European-wide austerity plans.  Greeks will now go back to the polls in June.

They would also have been finalised before the latest falls in New Zealand's commodity prices and an unexpected rise in unemployment. Prices at Fonterra's GlobalDairyTrade auctions are now at their lowest levels in three years, while ANZ's commodity price index, released on May 2, is at an 18-month low.

The New Zealand dollar has fallen from just above 82 US cents at the end of April to 76.6 US cents at time of writing.

'Look to their downside scenario'

While Treasury would have approached its forecasting with the caution forced by the global economic environment, Infometrics economist Gareth Kiernan doesn't think the government's forecasters would have expected such drops in commodity prices and the currency so soon.

In its own latest forecasts released in March, Infometrics had been expecting the Greek crisis to be resolved, which had appeared to be the case until a month ago, Kiernan said.

That means Budget 2012's downside scenario, where Treasury details an alternative track for the economy if headwinds are stronger than expected, may be of interest to Budget watchers.

“The risk for them is their economic growth looks overly optimistic. Maybe their assumptions on commodity prices as well – who knows. The tax take might not be as good as they expect, and the 2015 surplus target doesn’t look real," Kiernan told

“To be honest it was pretty dicey to begin with."

“Just what we’re seeing on dairy prices is pretty concerning for us, really. They’ve dropped off further than we would have thought," he said.

Infometrics' forecasts were based on two key elements in terms of getting the economy, and therefore the government's tax take, going again.

"One is the Christchurch rebuild, and I haven’t really seen anything there to change my view that it’s not until next year that you’ll start to see a bit more momentum," Kiernan said.

The second was getting farmers out spending a bit more freely again.

"Well, they’re not going to be doing that while commodity prices are falling. We’ve had anecdotal evidence at times over the last year that they were starting to feel a little more comfortable about spending, particularly around the middle of last year before Europe started to blow up," he said.

But at the moment farmers would again be looking to build up cash reserves and pay down debt.

“Not quite doing the bare minimum, because some of the farmers will be doing OK, but they’re definitely not rushing down to town and spending great deals of money,” Kiernan said.

Spain is the one to watch

BNZ's head of research, Stephen Toplis did not think the latest Greek news represented a step-change in what was happening in Europe. However, markets had not been expecting New Zealand's commodity prices and the currency to drop as fast as they had in recent weeks.

“It’s a reflection of the heightened uncertainty that something like Greece brings,” Toplis told

“We are watching Greece. But fundamentally what has happened is not a deal breaker for anybody. And let’s face it, we’ve now got to wait for another set of Greek elections anyway," he said.

“In some ways Greece is a red herring in all this. The real issue is what happens to countries like Spain. A more alarming aspect of the last few weeks has been the blow-out in the Spanish bond spreads to German bond spreads to record highs.

“Greece will do what Greece does. It will be interesting and it will create lots of financial market volatility, but what Greece does is not the make or break of Europe. It’s what happens elsewhere,” Toplis said.

Having said that, markets would still focus on Greece because it was the news of the day.

On the fallout from a possible Greek debt default, Toplis noted creditors had already forgiven 75% of the government's debt.

“So three-quarters of the cost is already behind everyone – they’ve only got 25% left.”

“I think the more interesting thing for Greece, and the message it gives to others, is the possibility of civil unrest, and instability in the rest of Europe as a consequence of that. You’d have to say the probability of that continues to mount, not only in Greece, but places like Spain," he said.

“If you’ve got a 25% unemployment rate and a 50% youth unemployment rate, then the likelihood of some sort of civil unrest rises exponentially.”

We welcome your comments below. If you are not already registered, please register to comment.

Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.


Great article, sounds like Treasury's "downside scenario" should be viewed as the "central scenario" 
what a mess

It doesn't matter what Treasury or the Govt forecast as the economic projections are always wrong.  They have no clue at all and IMHO the lot of them should be sacked and save the tax payer some money.
I am looking forward to the budget as a piece of entertainment to see what crap they come out with this time.  How many new jobs will be forecast to be created this time ?  Haha.  Just as well everyone is scarpering or the unemployment figures would be much worse.
Draw your own conclusions on economic growth from your own research.  The Govt & Treasury constantly project spin and BS

Yes, I'd sack them all tomorrow....I think Treasury's worst case forecast scenario was exceeded in 2008....if they hadnt been so blinkered they would have been a lot closer....and nothing has changed....same neo-classical right wing free market economic mantra....its failed......
I dont think this Govn forecasts, they pray.........

Sadly a long time ago Treasury degenerated into an advertising agency for whichever neo-classical political party was in power.  Truth and accuracy are way less important to Treasury than making the numbers look good for government.  Totally not behaving as a public service. 
Maybe we need a budget review office that is an officer of Parliament to provide economic projections?

True true. Nz owes aus big time, if aus hadn't been comparatively strong nz's unemployment would be well above 8%. I'm looking forward to the comedy show that is the budget too

Oh come on , behave yourself : There's 4 " too-big-to-fail " Aussie banks who have NZ property investors & farmers screwed over a barrel ......
Slobber / Gobble / SLURP !!!....... they're sucking the economy dry ........ remorselessly..
..... we " owe " Australia as far as one can bowl a cricket ball ...... under-arm ! 

but GBH, we exposed our its know, why invest in making a good or at least shares when you can get a capital gain tax free....
Im waiting for the whining to start aka the finance sector disaster.......funny that NZers consider poms whinge, yet ive had several years listening to NZ OAPs etc doing the same thing....

too funny GBH, the Greece situation not factoored into forecasts. Was there last month, any commentator visiting  a couple  days would see it is not going to be resolved. Good grief.

I think we've all known that the Greece situation would turn septic sooner or later : They " fudged the figures " ( lied ! ) to gain entrance to the Eurozone initially ...... when the government changed in 2009 the new leaders found the books understated government debt by more than 50 % ......
...... the best solution now , albeit a tadge messy , is to begin removal of Greece from the Euro , and a reintroduction of the dratma ( it used to be the drachma ..... but it's gonna sink so low , that any Greek boy wishing a trip overseas is gonna say , " drat , ma ! "
Give it a couple of years , and it can be done ...... after all , the UK left the ERM successfully , when Lord George Soros did them the mother of all good turns ........

Pssssst Gummy...I've put you down for $5 million in Spanish ten year regional govt worries mate...triple as houses and paying can't lose.

Elaborate AJ..can't get the link!!!

Moody’s is set to ‘significantly’ downgrade 21 Spanish banks within a week, following a cut of credit ratings on Italian banks, the Spanish economic daily Expansion said on Wednesday.
“Sources in the Spanish financial sector are convinced that the agency will lower in a significant manner the ratings of numerous institutions,” said the daily.
“The announcement can come within a week according to market sources,” it said, adding that 21 banks would be affected.
The downgrade would deal a further blow to battered Spanish banks, which find it hard to borrow money from other banks because many in Spain are heavily exposed to a real-estate sector that has been in a slump since 2008.
In April, Spanish banks borrowed a record 263.5 billion euros ($339 billion) from the European Central Bank, the lender of last resort to eurozone commercial banks.
On Monday, Moody’s slashed its credit ratings by up to four notches for 26 Italian banks, citing their vulnerability to Italy’s recession and further trouble in the 17-nation eurozone.

Thanks for the offer , Wolly , but I'm a Euro septic , myself .
...... why doesn't the ECB just launch into QE a'la Ben Bernanke ? ....... crank out the Euros , force interest rates down , and ease up a smidgeon on the " austerity " .......

A luvly question there GBH.....yes indeed, not too sure the underwriters of the Euro would be so keen on  the idea......The concept being hey look we print you deflate we print.....don't cross the streams.
On the deflation...I think Japan has proved it possible to survive through long periods of managed deflation despite the obvious currency disadvantages......maybe Bonner has been doing a little case study and therefore concluded cash is King.....
But ......Don't cross the streams...!!!!

.... I have to confess to having enjoyed Bill Bonner's books , Count ....... and am registered with " The Daily Reckoning " ......
It's just my Gummy gooey guts that tell me to take predictions with a grain of malt ( tried " salt " , yuck ! ) .. ..
... I mean , gor blimey , if Bernard ( Our Leader , Hollowed Be Thy Name ) can't get it right , on prognosticating , who can ........... hmmmm ?

The answer Gummy is there to won't take the Spanish bonds I put your name down for, because they are are all the piigs bonds.

Gummy - I'm sure you have lots of spare money - go, go for gold = safe investment - back to US$ 1'800.- p/oz + by end of July 2012.
At least New Zealand is among countries with great gold reserves.

Forget Gold Gummy..go for property in as chips!

Wolly - yes driving up and down the SI, it looks like the entire country side is for sale including businesses and sunny Blenheim.

If gold is the commodity of " fear " ........ why has it fallen 'like a gold-brick lately ?
......I  like your suggestion Wolly ....... something seaside along the Kaikoura esplanade ... nice !

- yes safe as a tsunami.

Geez Louise Walter : Did you wake up in Gerry Brownlee's dirty laundry basket or something ?
...... dude , you live in one of the prettiest towns in one of the luckiest countries in the whole wide world ......
Cheer the feck up , or I'll send the Count along to administer another flogging .....

Gummy - I would be probably dead by now waking up and struggling out of Brownlee’s dirty laundry basket.
Of course I’m aware of living in one of the nicest environment in the world. We just had lunch, admiring the sea, the village and the snow-capped Kaikoura Ranges – even Queenstown/ Wanaka or Loburn doesn’t beat that.

But are you breathing it in Walter....?are you sucking it up...?are you living it...?or just aware of it...  ?...enjoy it Walter..... you have probably earned that privelege....go on have some know you want

Forget the property in Kaikoura GBH.! the chips....there cheap as .. an you can eat em....or throw them at seagulls...or pass the time reconstituting the into a pre-fried potato .....or stick them down on the black at the Sky Tower.
 Buy the Chips.!!!!!

..... so far , the chips in Australia are a pale comparison to the succulent salty treats from NZ ...
Spotted Heston Blumenthal's triple cooked chips episode on TV , brilliant ! ...
..... my little  chef  baked a Chicken a'la Heston , and it was bloody magic ....... so moist & sweet , just like snogging with Paula Benefit ......