OECD sounds 'overheating' warning as NZ inflation bites and interest rate rises kick in
New Zealand should brace itself for more economic turbulence in 2022, with the latest OECD forecast for 2022 praising recovery, but warning that the Kiwi economy might be on the brink of ‘overheating’.
The report called out the ongoing issues with inflation and the tightening of the labour market as pressures that could yet push prices higher in the near future.
“Inflation soared to 5.9% in the year to the fourth quarter of 2021, well above the Reserve Bank’s 1%-3% target band, and core inflation measures increased to above the upper bound of the band,” read the report. “Five-year ahead inflation expectations have increased for households but less so for businesses.”
The growing disparity between house prices and incomes was also mentioned as a potential long-term issue that New Zealand will have to deal with, though the report backed current government policies that should see the market constrained in 2022.
Read more: Auckland property prices likely to fall in near future
“Highly expansionary monetary policy and the suspension of loan-to-value ratio (LVR) restrictions in 2020 spurred mortgage lending, pushing up household debt to 169% of disposable income and house prices to levels that the RBNZ judges to be unsustainable,” it read.
“To limit financial stability risks, the RBNZ has increased LVR restrictions and has begun a public consultation on introducing debt-servicing-to-income or debt-to-income restrictions.
“Tightening monetary and macro-prudential policies, lower migration inflows and the March 2021 tax measures to discourage investment in rental properties have reduced housing demand.
“This, together with policy measures underway or planned to increase housing supply should eliminate shortages and increase affordability.”
The lack of inward migration caused by the COVID-19 pandemic was cited as a potential stumbling block to the Kiwi recovery effort, with efforts to improve productivity stymied by fewer skilled migrant arrivals.
“New Zealand is relatively advanced in some aspects of digitalisation, such as the high share of small firms selling online or use of the Internet of Things,” said the report.
“However, the digital sector is smaller than in other OECD countries and has relied heavily on skilled migrants to fill jobs requiring advanced digital skills.
“It is now facing a severe skills shortage caused by border restrictions in the short term and competition from other countries in the longer term.”
