Govt optimistic about growth forecasts now Treasury has figured out how much consumers have altered spending habits, English says

The Government now has a good understanding of how consumers have controlled their spending behaviour, giving an air of confidence about Treasury’s economic growth forecasts contained in this month’s Budget, Finance Minister Bill English says.

Treasury is forecasting Gross Domestic Product (GDP) growth of 1.8% in the year to March 2012 to be followed by 4% growth in the year to March 2013, 3% in 2014 and 2.7% in 2015. Short-term growth rates are expected to be supported by rebuilding work in Christchurch after the devastating February 22 earthquake, high export commodity prices and the Rugby World Cup later this year.

Treasury’s forecasts have drawn criticism from some commentators who say they are too optimistic, although English today moved to defend Treasury’s forecasting, saying it was in the middle of the pack in comparison with other forecasting outfits.

Treasury Deputy CEO Andrew Kibblewhite also defended Treasury’s track record, saying analysis it had done showed over the last 10 years Treasury had been in the number one or two slot of forecasters in terms of accuracy.

'Don't worry, we know now'

Speaking in front of Parliament’s Finance and Expenditure select committee on Wednesday, English said the Government was pretty optimistic about prospects for economic growth.

However it was a legitimate question that “if there [were] forecasts for growth 12 months ago that didn’t eventuate, why would it be any different this time?”

There were a number of aspects for confidence in the latest forecasts, English said.

“One of them is that I think everyone now has a much better understanding of the impact on growth of the changed attitudes of New Zealand consumers, where after a good decade – in fact more – where they’ve had the tail wind of strong credit growth – credit consistently growing faster than the economy – that fed house prices and consumption,” he said.

“The global recession brought a pretty large full-stop to that process, and New Zealanders have adjusted by becoming quite cautious more rapidly than we might have expected, and I think we’ve now got a good understanding of the impact of that on general consumption, on the housing market,” English said.

“So the forecasts I think reflect that caution.”

On the positive side of the ledger there was the expected persistence of relatively high export prices that were allowing the export sector to deal with its debt.

“Particularly the rural export sector, and as it does that those benefits will overflow into the economy,” English said.

“And you’ve got the rebuild of Christchurch where between the Government and insurance contributions we’re looking at expenditure of somewhere between NZ$15-20 billion in Christchurch over the next two or three years,” he said.

The rebuild was going to create supply constraints, more jobs and may have price impacts in some parts of the economy.

“But it will have an economy-wide impact just because of the sheer quantity of spend,” English said.

“In fact it’s going to distort our macro-economic aggregates for another two or three years.”

Reserve Bank Governor Alan Bollard, who is expected to leave interest rates on hold tomorrow at a record low for the Official Cash Rate of 2.5%, has said he expects to start increasing interest rates when it is clear inflationary pressures are flowing through the economy due to the Christchurch rebuild.

Economists have taken this to mean resumption of rate hikes in either December this year or in the first quarter of 2012.

'Job figures not that great'

Meanwhile English said Treasury’s forecast for 170,000 new jobs to be created over the next four years was “pretty close” to average job growth between 1990 and 2005.

“So it’s not really exceptional. In fact you could argue generally New Zealand coming out of recession would be expected to have a faster rate of job creation,” English said.

“But given the type of recession it’s been, and the fact that consumers are so cautious – so job-rich areas such as domestic construction and retailing at least up until now have not taken off - you could argue that’s why it’s a slightly lower rate of job creation,” he said.