Treasury has cut the growth forecasts for New Zealand's economy it gave in its pre-election update (PREFU) because of the worsening European sovereign debt crisis.
In its latest monthly economic indicators released this afternoon, Treasury said PREFU assumed that European governments would manage the crisis without too much more damage to the real economy.
However, "financial tensions have escalated and dragged down growth forecasts in the region and across our major trading partners."
"Although the outlook is still well above the indicative downside scenario outlined in PREFU, it has weakened to the extent that we now expect New Zealand's economic growth in the year ending March 2013 to be closer to 3 per cent than the 3.4 per cent we had forecast in the Pre-election Update," Treasury said.
"It is likely that growth will also be lower in subsequent years, but it is too early to judge how material those impacts might be. We continue to expect the Canterbury rebuild to begin in earnest in the second half of 2012 and to provide an offset to global weakness.
"Easier monetary conditions, through a lower exchange rate and a potential delay to the start of expected rises in the Official Cash Rate, will also provide some offset to a weaker world economy," it said.
"In the PREFU we noted that in the downside scenario tax revenue would be around NZ$14.5 billion lower across the four-year forecast period.
Although we are still well away from the downside scenario, global economic risks have increased the chances of a downgrade to our revenue forecasts when the Treasury publishes its 2012 Budget Economic and Fiscal Update."