As forecast last week, the New Zealand government has confirmed a smaller budget deficit (and trimmed future surplus forecasts) and revealed plans for a stimulus package involving more than $NZ12 billion of infrastructure spending.
But even though the NZ economy is clearly feeling the impact of slowing growth, wages and labour market growth, it is still better placed than the moribund Australian economy.
NZ inflation is running at an annual 1.5% which is about what the Aussie rate is (on the RBA’s core measures).
The plans to boost spending by borrowing more money from debt markets won an immediate tick from one of the world’s three major credit rating agencies.
Finance Minister Grant Robertson flagged the package last week in the country’s mid-year economic update as the Kiwi economy battles slowing growth, weak consumer spending, very low inflation, and weak wages – a situation not unlike Australia where the mid-year update will be issued next Monday.
The NZ Treasury department predicted a $NZ900 million budget deficit in the current 2019-20 year, down from the $NZ1.3 billion forecast in the May budget.
“A small deficit in the current year is not surprising, given the impacts global headwinds are having on confidence here,” Finance Minister Grant Robertson said in a statement, after releasing its half-year economic and fiscal update.
The Treasury also cut expected surpluses for 2021 and 2022 as economic growth slows amid heightened risks from factors such as the US-China trade war and the Brexit uncertainty (which may or may not be resolved tonight in the UK election).
The growth forecast for the current year was cut to 2.3% from the previously forecast 3.2% – that still makes the Kiwi economy a faster-growing one than Australia where GDP growth is running at an annual 1.7% (thanks to revisions of previous quarter’s data of 0.2%).
The centerpiece is the plan to spend $NZ12 billion on new infrastructure investment, which will the highest level of capital spending in more than 20 years.
That includes $NZ6.8 billion for transport projects and funds for schools and hospitals.
Robertson said the government will maintain net debt within a range between 15% to 25% of GDP, but the big attraction is being able to borrow a lot of money for lower than usual cost – around 1.3% for 10-year bonds in NZ debt markets.
Government debt will increase to $NZ76 billion by 2022, up from the $NZ69.8 billion forecast in the budget.
Ratings group, S&P Global said that New Zealand’s sovereign credit rating can absorb more fiscal spending even as it delays a return to budget surpluses.
“We expect these factors will further delay the forecast return to general government surplus until fiscal 2024, noting that this was delayed by a year to fiscal 2023 in the 2019-2020 budget released in May.”
Unemployment is expected to tick up next year. In the May budget, Treasury forecast an unemployment rate of 4% next year, but it’s now expected to be 4.3%, and will stay between 4.2% and 4.3% until 2024.
Australian unemployment is current 5.3% and won’t be dropping under that level in the foreseeable future.
Wages are expected to increase by 3% in 2020, rising to 3.3% the next year, and hitting 3.7% growth by 2024. By way of contrast, Australian wages are forecast to bumble along at 2.2% to 2.3% over the next three years.
