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New Zealand growth outlook to be unhappy read, finance minister warns

New Zealand growth outlook to be unhappy read, finance minister warns
A pedestrian in front of a burger restaurant at dusk in Wellington, New Zealand, on Tuesday, 29 August 2023.

New Zealand’s official growth forecasts will paint a gloomy picture of the economic outlook when they are released later this month, Finance Minister Nicola Willis said. 

The Treasury Department projections will be included in the government’s Budget Policy Statement scheduled for release on 27 March, Willis told business leaders in a speech in Auckland on Friday. “The numbers haven’t been finalised, but I know enough to say they won’t make happy reading.”

High interest rates and a rising cost of living have damped sentiment and weighed on activity, and economists say the nation only just avoided a double-dip recession in the second half of 2023. Willis, who took over as finance minister following an October election, faces declining revenue at a time she wants to cut income taxes and try to return the books to the black.

In December, the Treasury projected gross domestic product increased by 1.6% in 2023 and would grow by the same amount this year. But the Reserve Bank last month forecast an expansion of about half that pace.

GDP contracted in the third quarter and a report next week will show fourth-quarter growth of just 0.1%, according to a Bloomberg survey of economists. The Treasury had forecast 0.4%.

“Due to factors outside the government’s control, the Treasury has become even more pessimistic about the growth outlook,” Willis said.  It is “now warning me that growth over the next few years is likely to be significantly slower than it had previously thought,” she said.

New Zealand two-year swaps fell 2 basis points while the kiwi slumped as much as 0.6% against the dollar to 60.97 US cents after the growth warning. The currency is the worst performer among major developed-market peers on Friday.

The move extends the kiwi’s loss against the greenback this year to 3.5% as expectations of central bank interest-rate cuts gather pace in the face of soft economic data. That’s despite the RBNZ projecting it will keep rates unchanged until 2025.

“We see them cutting from May,” Oliver Levingston, a rates strategist at Bank of America, said in an interview earlier this week. “The risk to our view is that the RBNZ instead starts cutting later, but we’re talking months not quarters.”

Budget surplus

Last month, Willis said she wouldn’t describe herself as optimistic about achieving a projected budget surplus in 2027. On Friday, she said the government won’t be breaking its election commitments and will try instead to weather the storm. 

“We will stick to our commitments to lower personal income tax, to drive more resources into front-line services and to invest in infrastructure,” she said. “This is essential to support New Zealanders’ confidence: not just their confidence in our government but their confidence in their own prospects.”

The government will also work even harder to derive more value from its own spending, to stop waste and to make decisions now that will make New Zealand more fiscally sustainable in the medium term, she said.

Willis also pledged to pursue policies that will reinvigorate economic growth, including removal of red tape, increased investment in education and skills, and promotion of innovation.

“The way I see it, New Zealand’s economy is giving us all a wake-up call,” she said. “With low-growth forecasts bearing down, now — more than ever — we must double-down on the drive for real economic growth. We must pull out every stop to beat the gloomy forecasts and get this country growing faster, more productively and more sustainably.”

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