B.2 & B.3 | 61
Economic and Tax Outlook
Real Gross Domestic Product (GDP) growth has re-accelerated after a short period
of below-trend growth
• The economy expanded by 0.8% in
the last quarter of 2006, a pace
estimated to have been matched in
the first quarter of this year.
• Quarterly real GDP growth is
expected to be maintained at or just
below potential (around ¾%) before
easing in late 2007. The pace and
duration of the current rebound is
the main uncertainty of these
• The central forecasts see annual
average real GDP growth of 2.6%
over the year to March 2008, up from 1.7% in the March 2007 year. Key risks and two
alternative scenarios are explored in the Risks and Scenarios chapter.
The upswing is being driven by a rebound in domestic demand
• Household consumption and investment spending have rebounded. The recent
momentum is expected to be sustained for the next few quarters on the back of
ongoing strong labour income growth. Additional support has come from somewhat
lower oil prices, the recent pick-up in house price growth and immigration flows, the
final stage of Working for Families and the high exchange rate keeping prices for
imported goods and services low.
• Business investment has rebounded sharply, while government consumption and
non-market investment are forecast to contribute around a total of 0.2 percentage
points to quarterly growth.
Figure 1.1 – Growth in real production GDP
Mar-96 Mar-98 Mar-00 Mar-02 Mar-04 Mar-06 Mar-08 Mar-10
Quarterly % change
Annual average % change
Sources: Statistics New Zealand, The Treasury
2007 ! BUDGET ECONOMIC AND FISCAL UPDATE !
62 | B.2 & B.3
The brief period of slower growth was not enough to lower inflation pressures
which remain elevated and the exchange rate is near post-float highs
• Despite an expected temporary
easing in annual Consumers Price
Index (CPI) inflation to 1.7% in
September 2007, associated with