31 May 2018

NZ economy forecast set to outpace most of OECD

8:12 pm on 31 May 2018

The New Zealand economy is set to grow at a faster pace than most of the countries in the 35-strong OECD, with activity shifting from consumption to investment.

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Photo: 123rf

In its biannual economic outlook, the OECD forecast economic growth of three percent in 2018 and 2019.

The country's economic growth was solid in 2017, underpinned by consumption and tourism.

The OECD - an intergovernmental organisation of developed countries - expected private consumption would slow due to lower immigration and an easing in the wealth gains from house price increases.

But demand in Auckland and the government-funded KiwiBuild programme would support residential investment, the outlook said.

Government spending on infrastructure would rise and business investment should recover after weakening at the end of last year due to capacity constraints, the organisation predicted.

Fiscal policy under the Labour-led government was expected to become expansionary, fuelled by the $5 billion families package, $2.6bn first year tertiary fees initiative and higher spending on health, education and homelessness.

The extra spending did not threaten fiscal stability, with government debt still declining as a share of GDP, the OECD said.

The organisation forecast government gross debt would fall to 35.7 percent and 35.6 percent of GDP in 2018 and 2019 respectively, from 36 percent in 2017.

The Reserve Bank was expected to lift interest rates next year to slow rising inflation pressures from capacity constraints and higher import prices.

Higher interest rates were projected to keep inflation near its two percent midpoint target.

The OECD said expected rises in interest rates and government spending would improve New Zealand's macroeconomic policy balance and both should also serve to reduce housing market pressures.

However, it warned the resolution of infrastructure and planning constraints in Auckland was critical to easing affordability challenges, boosting weak productivity and avoiding further house price hikes.

The biggest risk to the economy is a sharp downturn in the housing market as household debt was at record levels relative to income, the OECD said.

Conversely, the report said short-term growth could be higher if housing shortages in Auckland triggered further price rises and associated wealth effects.

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