Source at: http://www.treasury.govt.nz/budget/toc_bud.htm

Snips by Ross Stewart at:http://www.wilsonwhite.co.nz/

------------------ Budget info follows --------

---- 1st Y2K reference ----- Speech 1999 - B.2 - page 17 (contained in fsr99.zip) -----

Y2K

Business has six months left to get to grips with the Y2K computer problem. The Government is playing its part. Good Samaritan legislation has been passed to encourage businesses developing remedies to share that information. The Budget provides $2.2 million for the Y2K Readiness Commission's communications [programme].

---- 2nd Y2K reference ----- 1 - Economic Outlook - B.3 - pages 25 & 26 (contained in befu99.zip) -----

BOTH UPSIDE AND DOWNSIDE RISKS SURROUND THE CENTRAL FORECAST.

As always there are risks and uncertainties surrounding the central forecast track.

It is not time yet to be too sanguine about the global economic outlook, with a number of potential threats to the sustainability of improved global growth remaining. Deteriorating global economic prospects would make for a background less conducive to New Zealand's growth. In addition, while proving difficult for anyone to quantify, the potential for Y2K associated disruption looms.

Upside risks to the central forecast track stem from the possibility that there may be a greater export response to past easings in the exchange rate and/or a stronger recovery in the domestic economy. A stronger-than-anticipated recovery in the domestic sector would increase both inflationary and current account pressures.

Analysis of the risks to the central forecast is contained in Chapter 3.

MACROECONOMIC IMPACT OF THE YEAR 2000 BUG

The Year 2000 (Y2K) problem involves a risk that some computer-based systems will fail to recognise dates correctly, particularly on 1 January 2000. We have identified three main ways in which Y2K is likely to affect the economic outlook.

Spending on Fixing Y2K Problems: In the period up to 2000, investment spending on fixing Y2K problems is likely to add to economic growth to the extent that there is an increase in overall investment. To the extent that this is investment brought forward from future years, economic growth beyond 2000 will be reduced as investment spending unwinds. We estimate that spending on fixing Y2K will add around 0.1-0.3% to New Zealand's annual economic growth in the period 1997 to 1999, followed by a similar negative influence on growth beyond 2000.

Behavioural Responses: Individuals' and businesses' perception of possible Y2K impacts, and the perceived level of readiness, are likely to lead to behavioural effects. This includes an inventory build-up in order to avoid running out of supplies early in 2000. We estimate that this will add about 0.3% to quarterly GDP growth in the last part of calendar 1999, but will lower growth by a similar amount in the early part of 2000 as inventories are returned to more typical levels.

There may also be increased volatility in financial markets around the turn of the century, as domestic and foreign investors assess the situation.

Supply Disruption: There is potential for Y2K-related failures on 1 January 2000 to disrupt businesses and households, with flow-on effects to the macro economy, if adequate corrective action, both in New Zealand and amongst our major trading partners, is not carried out. There is still considerable uncertainty about the level of disruption that could actually occur. However, historical precedents such as the Auckland power crisis in 1998 show that such events, while having a significant impact on people's lives, have little impact on overall economic activity. This is because people generally find alternative ways to conduct their business and considerable new economic activity is often generated in fixing the problem.

Based on current information, and assuming a relatively high state of readiness, our view is that the New Zealand economy is most likely to experience only a small temporary negative impact on growth in early 2000 owing to Y2K-related disruption. If quantified, the impact could be around 0.1 to 0.3 of a percentage point of annual GDP. Scenarios involving major prolonged disruption leading to larger impacts have low probabilities.

Treatment in the Economic Forecasts

These Budget economic forecasts implicitly include the estimated impact of Y2K on inventories and spending on fixing Y2K problems. This is similar to the approach used by other forecasters. The forecasts have not been adjusted, at this stage, for potential impacts arising from disruption, owing to the uncertainty involved. We will update our view in subsequent forecasts, if necessary, as more information becomes available.

---- 3rd Y2K reference ----- 3 - Risks & Scenarios - B.3 - pages 58 & 59 (also contained in befu99.zip) -----

ECONOMIC RISKS

There are risks that the economy could grow differently from the Central Forecast. The Central Forecast balances the upside risks facing the economy against the downside risks, in order to reach our best assessment of the way the economy is likely to evolve. However, it is almost inevitable that some of these risks will turn out differently from our prediction, so leading to different economic outcomes.

For example, the Central Forecast incorporates a reasonable upswing in export volume growth, with the sizeable depreciation in the exchange rate over the past two years providing a catalyst for more favourable export growth.

However, it may underestimate the positive effect that the fall in the exchange rate will have on export volume growth. The Central Forecast may also underestimate firms' ability to penetrate new markets in light of New Zealand's increased price competitiveness. These factors could also lead to higher growth in the domestic economy.

On the other hand, there could be a more adverse effect of back-to-back droughts than the Central Forecast assumes, particularly over the next quarter or two. The Central Forecast assumes some adverse effect from two consecutive droughts. Nevertheless, back-to-back droughts may result in a weaker profile for agricultural exports, while the adverse flow-on effects to the rest of the economy may be more pronounced than those embodied in the Central Forecast. This could lead to a weaker recovery in the near-term than has been anticipated.

Furthermore, recent climate forecasts suggest a continuation of La Nina weather conditions next summer, which could produce further drought conditions in some areas.

In addition, a sharp slowdown in the world economy is still possible. The Central Forecast reflects the consensus view of global growth prospects. Here, global growth, as measured by trade-weighted growth in our top ten trading partners, is seen as lying in the range 2-2.5% over the next three years.

Yet, there remain significant downside risks to the global economic outlook, particularly for calendar 2000.

There is a danger that the US will experience a marked slowdown in economic activity, perhaps triggered by a severe downward correction in the US stockmarket. Such a slowdown could adversely affect the Australian economy, whose economic fortunes are generally closely tied to those of the US.

Risks to world growth also exist from the possibility of continued recession in Japan, ongoing structural problems elsewhere in Asia, a prolonged war in the Balkans impacting on Europe, and the ongoing risks of emerging market economies. In addition, the new millennium may trigger serious disruptions throughout the world by way of the Y2K computer problem.

Other risks could also alter the nature of the recovery. For example, the current elevated levels of business and consumer confidence, combined with the strength in the labour market seen recently, may point to a more vigorous recovery in the domestic economy. The recent decision to demutualise Tower Corporation could provide added impetus to the domestic sector.

The high level of the current account deficit heading into this recovery poses a further risk. A significant widening in the current account deficit, perhaps due to a slowdown in global activity or a vigorous recovery in the domestic sector, might trigger a loss of confidence in New Zealand's external position. This would be likely to lead to a very different mix in monetary conditions: interest rates would be higher, while the exchange rate would probably suffer from a substantial downward correction.

If eventualities such as these transpire, the growth path for the economy and the composition of that growth could look very different.

---- end of Y2K references ----

-- Bob Barbour (r.barbour@waikato.ac.nz), May 20, 1999