Falling commodity prices take heat out of economy, Treasury says

This year's drop in global dairy and log prices has slowed the pace of the New Zealand economy earlier than expected, while lower than anticipated GST receipts are likely to trim the projected government surplus, according to the latest Treasury forecasts.

In the pre-election economic and fiscal update, the Treasury now sees an earlier decline in the terms of trade than anticipated at the May budget update, though still expects the measure, which shows the proportion of imports that can be bought with a set amount of exports, to remain above the long-term average, with a slump in dairy prices a short-term factor rather than a structural issue. It sees the terms of trade falling 0.7 percent in the 2015 financial year, turning around an expected 1.6 percent gain in the May forecast. The Treasury trimmed 0.2 of a percentage point from its forecast growth for gross domestic product of 3.8 percent in the 2015 financial year, with subsequent expansion expectations remain intact.

"Should dairy prices continue to fall, it will have negative implications for the economy and the Crown accounts over the forecast period," Treasury secretary Gabriel Makhlouf told a briefing in Wellington. "Recent volatility in prices is a timely reminder that New Zealand's strength is influenced by changes in international trading conditions."

New Zealand's economic fortunes have been beefed up by 40-year high terms of trade over the past 18 months, a record the National-led government was touting as it goes into a finely balanced general election next month. Log and dairy prices have dropped from record highs earlier in the year, with previously rampant Chinese demand coming off the boil.

The forecasts do not include the most recent drop on the GlobalDairyTrade platform, which took dairy prices down to their lowest since October 2012. The next event is on Tuesday in the US. While the drop increased the chance of the Treasury's downside scenario, which predicts a lower growth track, the government department still sees its central forecast as the most likely.

The pre-election forecasts retained the government's ambition to get the books back in black in the current financial year, projecting an operating balance before gains and losses showing a surplus of $297 million in the year ending June 30, 2015, down slightly from the surplus of $372 million at the May budget. The projected surpluses in subsequent financial years are $500 million lower than the previous forecast due to a lower tax take than previously forecast.

The Treasury said the lower forecast for tax revenue was largely due to reduced household spending cutting expectations for goods and services tax. The tax take, while growing, has missed expectations in recent months due to GST and company tax coming in below forecast. The Treasury anticipates company tax revenue will increase in coming years as the economy continues to grow.

Finance Minister Bill English told the briefing both the declining commodity prices and weaker than expected household spending were weighing on the government's books, though the track retained its return in surplus.

"There's no room for significant loosening of the policy settings," he said. "Our first responsibility is to keep the government back in surplus and continue to reduce government net debt."

The lower operating surpluses and tax take than previously expected will delay the a return to cash surplus by a year, pushing out the government's plans to resume contributions to the New Zealand Superannuation Fund. That also pushes up the government's projected net debt to peak at $67.9 billion in the 2018 financial year, compared to $64.9 billion previously expected in the May forecasts.

Separately, the New Zealand Debt Management Office kept its domestic bond programme unchanged from the budget, which will issue $29 billion of bonds over the next four years.

(BusinessDesk)