Treasury's deputy CEO warns outlook for global economic recovery has "eased slightly" after Budget 2011 forecasts were finalised

By Alex Tarrant

The outlook for the global economy has eased slightly since Treasury finalised its Budget forecasts in April, Acting Secretary to the Treasury Gabriel Makhlouf says.

In speech notes released on Thursday morning, Makhlouf, who was deputy chief executive under just-departed Secretary John Whitehead, said the international economy remained a source of potential downside to New Zealand's economic recovery.

Treasury's forecasts in the May 19 Budget showed GDP growth was expected to be 1% in the current year to June 30, before rising to 1.8% in the 2011/12 year, 4% in 2012/13, 3% in 2013/14, and 2.7% in 2014/15. See more here in Bernard Hickey's Budget 2011 overview.

The budget is relying on that strengthened growth from 2012/13 to boost tax revenues and help it reach a budget surplus (before gains and losses) in the 2014/15 year, although Prime Minister John Key has expressed desire for a surplus to be achieved a year earlier.

The government has said the recovery in economic growth would be partly based on rebuilding activity in Christchurch, but that it also relied on a strengthening export sector, meaning a stabilising global economy was needed for demand for New Zealand exports to increase.

The forecasts, and expected revenues, also show the government's net debt to GDP ratio will stay below 30% - peaking at 29.6% in 2015. Key and Finance Minister Bill English have both expressed a desire for net debt to stay below 30% of GDP, which they say is the level at which international credit rating agencies begin to take more notice of a nation's public debt.

Some set-backs to global growth

"While there are signs the global economy is recovering, there have been some set-backs recently," Makhlouf said in a speech to the New Zealand Institute of International Affairs.

"The recovery is being driven by emerging economies, in particular China and other Asian countries, and there are some additional benefits for New Zealand via Australia. Activity in the major developed economies has been slower to rebound as they were more directly affected by the global crisis and their economic challenges are more entrenched," Makhlouf said.

"Temporary shocks have also adversely affected economic activity, in particular the Queensland floods in Australia and the earthquake in Japan. These events are expected to reduce growth in the short term – today Australia reported a 1.2% fall in GDP in the first three months of this year – but rebuilding in both countries will boost it subsequently," he said.

Eurozone problems, rising food prices in developing countries could hurt NZ

Notwithstanding the positive headline picture, there remained an elevated level of risk around global growth.

"While there are some upsides, on balance the risks are weighted to the downside for the forecast period as a whole," Makhlouf said.

"As a result, the international economy remains a source of potential downside risk to New Zealand, with the possibility of rising global imbalances causing increased policy tension, the need for significant structural and fiscal policy change in many developed economies, and continued financial difficulties in a number of peripheral European economies," he said.

There was also the possibility of higher food and fuel prices eroding disposable incomes, especially in developing economies.

"What can be said is that the global recovery is more assured than it was in 2010 as the recovery has become more strongly established," Makhlouf said.

"Since Treasury finalised its economic forecasts for the Budget in mid-April, the outlook for the global economy has eased slightly with weaker data reported in the United States and in China, leading to a modest correction in some commodity prices. Concerns about euro area sovereign debt have intensified again," he said.

"In our Budget forecasts we developed a scenario in which rising consumer prices and monetary tightening, especially in developing countries, bring a slowdown in world growth, though we are still a long way from such a scenario.

"My last comment on this is that the chief challenges for policy-makers in this environment are the timely withdrawal of monetary and fiscal stimulus in such a way as to support growth and manage emerging inflation pressures, especially in developing economies. Little has been done so far to reduce global imbalances between high-savings, low-consumption economies (such as China) and heavily-indebted, high consumption economies (such as the United States)," Makhlouf said.

(Updates with background on forecasts)