assumptions underlying the economic forecast

The broad assumptions underlying the economic forecasts are generally outlined in the individual sections in the Economic Update.

The key assumptions are as follows:

• Real GDP is assumed to grow at 3.5% per year over the medium term, based on historical trends.
• Consumer price inflation is projected to increase by 2% per year over the medium term, the mid-point of the Reserve Bank of New Zealand’s range.
• These assumptions imply that nominal GDP will increase by around 5.5% per year over the medium term, reflecting growth in real GDP and inflation.
• In the short term, these variables are assumed to depart from their medium term paths in line with current economic conditions. Nominal GDP is projected to grow by 5.1% in 2005-06 reflecting slower than average growth in year average terms, and by 3.3% in 2006-07, the deflationary impact of the removal of import levies.

In terms of sectoral assumptions:

• Visitor arrivals are projected to grow by around 4.0% in 2005-06, with growth in the out-years projected to return to the long-term growth rate of around 3.8%.
• Pearl exports are projected to increase by 20% per year from the level recorded in 2004-05.
• Fish exports are projected to increase by 20% in 2005-06 from the relatively low level re-corded in 2004-05, and to stabilise at the 2005-06 level.
• Other exports; imports; bank deposits; bank loans and advances; and building approvals are all projected to increase in line with growth in nominal GDP over the medium term.

Complete report: MFEM, Half Year Economic and Fiscal Update