Treasury's economic update more pessimistic

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Last updated 15:02 05/06/2012

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Treasury is sticking with the central forecasts contained in its May 25 Budget - for now - though it admits the downside risks to its outlook have increased.

In its monthly update to ministers today it said the Budget's central economic scenario remains "appropriate at present" despite the worsening situation in Europe.

The central forecast "incorporated financial market volatility and below-consensus euro area growth", though the negative risks had increased.

Domestic business and household data in May were consistent with the modest GDP growth in coming quarters incorporated in the May 24 document, it said.

During May the Greek debt crisis became more serious,.

The Budget update's downside scenario "can be seen as illustrative of a situation where Greece leaves the euro area and contagion is limited".

The escalation of the debt crisis had seen a deterioration in global sentiment, which had hit financial markets internationally and domestically, with global equities falling to multi-month lows.

Safe haven bond yields had hit all-time lows and peripheral euro bond yields had risen substantially.

"We have seen some negative impacts on New Zealand, although there have been offsets. New Zealand commodity prices have fallen significantly and while some of the fall can be put down to rebounding supply, deteriorating global conditions have contributed.," Treasury said.

There have been offsets through a fall in the exchange rate, which had cushioned the drop in commodity prices, as well as decreases in the interest rates faced by both the government and households.

Business activity indicators point to GDP growth of around 0.5 per cent in coming quarters, similar to Budget forecasts.

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