Economy slower but still robust

The economy has lost some momentum since earlier in the year, the Treasury says, though it still describes the pace of expansion as robust.

Its pre-election economic and fiscal update (Prefu) still forecasts a small $300 million surplus for the current financial year, having revised down its estimates of both revenue and operating expenditure by around $300 million from Budget day levels.

Net Government debt by June next year will be $700 million higher than the Budget forecast, at $64.3 billion, or an internationally respectable 26.8 per cent of GDP.

Net debt is now forecast to peak at $67.9 billion in June 2018, $2.4 billion higher and a year later than forecast in the May Budget.

The underlining economic picture in the Prefu is somewhat weaker than on Budget day.

Economic growth this year is now forecast to be 3.8 per cent, compared with the 4 per cent forecast back in May.

Growth in nominal gross domestic product, a proxy for the tax base, has been revised to 5.2 per cent from 5.7 per cent in the Budget forecasts, reflecting both softer real growth and weaker terms of trade.

Real growth is still expected to decline over the coming years to 3 per cent in 2015/16 and 2.2 per cent the year after, similar to the Budget forecasts.

Employment growth this year is now expected to be 1.7 per cent, compared with the 3 per cent forecast in the Budget. Even so the unemployment rate next March is now expected to be 5.2 per cent (5.4 per cent previously) and wage growth a brisker 3 per cent, against 2.7 per cent previously.

"Recent falls in commodity prices (mainly dairy and forestry) have occurred earlier than envisaged in the Budget update," the Treasury says.

"As a result, the forecast decline in the goods terms of trade is occurring sooner than previously expected and consequently will provide less support to growth."

But it expects the terms of trade to stabilise during 2015, recovering some of the current decline, and to remain above the average seen over the past decade.

A lower terms of trade, combined with weaker export volumes, is expected to see the current account deficit widen from around 2.6 per cent of GDP now to 4.8 per cent by next March and 6.4 per cent from late 2016. ASB chief economist Nick Tuffley said there were no implications in the Prefu for financial markets, particularly with the bond tender programme unchanged.

"If anything the surpluses for the first couple of years were a shade higher than we expected, with the Treasury's economic forecasts slightly stronger than our own and highlighting a risk the revenues don't quite meet the projections."

The downward revisions to core Crown revenue, between $300 million and $500 million a year over the forecast period, "for us errs on the light side, although is reasonable given Treasury's economic forecasts", Tuffley said.

"Substituting ASB's lower forecasts would result in lower tax revenue and while not material in an economic sense, the 2014/15 surplus target would be tight. That said, the Government's surplus target is helped by expenditure revisions of close to $300 million in each of 2014/15 and 2015/16 with the majority owing to lower Treaty settlements expenditure (around $200 million)."