NZ economy red-lining with inflation stifling growth – report

Higher prices overshadow any real growth, economist says

NZ economy red-lining with inflation stifling growth – report

New Zealand’s economy is “red-lining” and continues to operate above capacity, with growth restrained by rising inflation and hard-to-find labour and materials, according to a new report.

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Infometrics’ March 2022 Quarterly Economic Monitor showed that economic activity increased 2% per annum in the quarter, but underlying growth was struggling with volatility tipped to continue over the next 12 months.

Brad Olsen, Infometrics principal economist and director, said “it’s harder and more expensive to find growth in 2022, with intense difficulties finding staff and materials across New Zealand,” RNZ reported.

“We're struggling to resource further growth in the near-term,” Olsen said. “In effect, the New Zealand economy is red-lining and continues to operate above capacity, with higher prices overshadowing any real growth.”

According to the quarterly Infometrics report, some areas, such as Otago and West Coast, had rebounded well from the weaker first summer of COVID-19 in 2020/21, while Hawke's Bay, Gisborne, and Tasman, saw the strongest underlying economic growth compared to pre-pandemic levels.

“Economic fortunes across the regions show a variety of outcomes, with changed working patterns, primary sector strength, and a shift from international to domestic travel all contributing to the change in economic impulse,” Olsen said. “Fractured supply chains, accelerating inflation, higher interest rates, and high levels of absenteeism from Omicron combined to throttle back the economic engine.”

Olsen said rising inflation was forcing the Reserve Bank to hike interest rates higher and faster, which would take some of the wind out of an overheating economy, but the risk of a hard landing had heightened with each passing day, RNZ reported.

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“Cost pressures are hitting the primary sector, with commodity prices pulling back slightly in recent times,” he said. “Concerns over global challenges remain elevated, posing a further risk to future growth.”

High inflation and fuel prices had artificially added to spending growth, Olsen said, while underlying household spending activity was more subdued with inflation increasing faster than wages.

“Workforce pressures across New Zealand are sky-high, illuminated by high levels of poaching, a net outflow of people migrating from New Zealand, and more restrained jobs growth recently,” he said.