Since the December HYEFU in New Zealand, the Treasury has been surprised on the upside in terms of domestic economic activity, but on the downside for inflation. The new forecasts incorporate stronger than expected migration and house price inflation, the drop in oil prices since the half-year forecasts were put together, and interest rates that are likely to stay low for longer.
Over the next year or two the Treasury's forecasts GDP growth of a little above 3% expected over 2015/16. Where Institutional Bank continues to have questions is around the Treasury's forecasts in the outer years of the projection, as the Canterbury rebuild winds down. The growth forecasts hover around 2.8% through to 2017/2018, slowing to 2.4% in the last year.
Indeed it's rather more optimistic than the Treasury's own forecasts six months ago, reflecting the more stimulatory interest rate backdrop. That optimism suggests downside risks to the Treasury's revenue forecasts further down the track - in a context where forecasts for surpluses are already looking vulnerable.
That vulnerability clearly emerged in the Treasury's economic risk scenarios. The upside scenario (featuring stronger net immigration) makes small surpluses a little larger, the downside scenario (greater weakness in the export environment) is enough to push a return to surplus out to 2018/2019.
