Responsible budget and sustained recovery in New Zealand

According to Statistics New Zealand, the economic recovery gained momentum in the last quarter of 2009, with GDP growing 0.8% on the previous quarter. Manufacturing activity was up 4.5%, after seven quarters of decline. However, per capita GDP is still 4% lower than in 2007 and that lost ground wont be regained until 2011.

May 2010 saw the most important budget in a decade, as the New Zealand government tries to build on the green shoots of recovery experienced in late 2009 and turn them into a sustainable platform for long term prosperity. To stimulate business activity, the rate of corporate tax will drop 2% - to 28% - while, at the same time, the Goods and Services Tax will rise to plug the gap in revenue. The treasury is forecasting that the tax changes in the budget will boost GDP by 0.4% in the 4 years to 2014 and by 0.5% in the following three years.

Better prospects for the construction sector

As in most markets, residential construction slowed dramatically in 2009, but New Zealand has a natural population growth that requires an estimated 18,000 new homes a year. In 2009 only 14,400 new homes where built - and this at a time when a surge in net migration meant more houses where required to meet the new demand. Both these factors will combine to push up the level of construction, as can be seen by the 57% year-on-year increase in housing consents in Q1 of 2010. This change in fortunes for the construction sector is likely to continue for 2 years, despite an anticipated tightening of monetary policy by the Reserve Bank.

Merchandise exports increased 9% year-on-year in April 2010, led by food products, wood and wood products. The trend in export values has risen 10.9% since September 2009, following 10 months decline.

Business investment spending was down 11% in 2009. However, with the recovery in the global economy, capacity utilisation is currently running ahead of the long-term average. When this happens it is normally followed by increased business investment.

The Reserve Bank forecasts growth of around 3% in 2010 and 3.5% in 2011, before it flattens to around 3% in 2012-2014. These growth forecasts are based on a further uplift in exports driven by a recovery in the global economy. However, the current account deficit, while shrinking from 7.9% of GDP in 2009, is not expected to reach positive territory over the next 3 years. Despite the slump in GDP during the downturn and the governments stimulus spending, sovereign debt is projected to peak at only 27.4% of GDP in 2015 before the budget returns to surplus.