Larger Deficit And Stronger Growth, RBNZ To Hike Further

The NZ government sees higher growth in FY24, which means it expects a recession to be avoided, but it is forecasting lower near term inflation. Due to the repair costs from recent weather events the budget deficit will be significantly wider in FY24 than projected in December, but in the following years it is due to narrow sharply and be in surplus in FY26, the opposite pattern to Australia. The Treasury has said that the budget is stimulatory and so rates will stay “higher for longer”. An expansionary budget in an already capacity constrained economy is likely to concern the RBNZ. A 25bp hike is expected on May 24.

• The FY23 deficit is forecast to be considerably larger than predicted in December by $3.4bn or 0.9pp. FY24 deficit is to widen to $7.6bn or 1.8% of GDP. The return to surplus has been delayed a year to 2026 (0.1% of GDP) due to repair costs from recent extreme weather. The debt ratio should peak at 22% in FY24.
• Treasury’s growth forecasts have been revised down to 3.2% in FY23 (previous 3.5%) but revised up to 1.0% from -0.3% for FY24 boosted by repair activity and the tourism recovery. Inflation should be lower in FY23 at 6.2% (6.4%) and FY24 3.3% (3.5%) despite this additional activity. The outer years have been revised up slightly.
• Finance Minister Robertson said that the recent current account deficit widening should reverse with it reaching 5.9% in FY24 after 7.8% in FY23 and 3.8% in FY27. This has been an area of concern for ratings agencies.
• With an election in October, unsurprisingly the budget contained some sweeteners for voters. Cost of living relief to include subsidies for early childhood education, prescriptions, free transport for children and lower household energy bills. There will be a $6bn National Resilience Fund with around $1bn available for immediate repairs in the next year and improving flood defences.
• See budget here.