NZ forecast to become world's 51st largest economy in 2018

Tourism was one of this year's key drivers of annual growth. Photo / file

New Zealand is forecast to jump one place in the world's economic rankings next year, according to a new global report.

The 2018 World Economic League Table, released yesterday, predicts New Zealand's Gross Domestic Product (GDP) will become the 51st largest in the world, up from 52nd. Economic growth is expected to have expanded by 3.5 per cent by the end of this year and 3 per cent in 2018.

This year's annual growth was driven by construction activity, a growing tourism industry and net inward migration, as well as the continuation of expansionary monetary policy, the report says.

Published by the Centre for Economics and Business Research (CEBR), the report predicts that India will for the first time leapfrog Britain and France to become the world's fifth largest economy next year, and China is forecast to overtake the United States as having the highest GDP by 2032.

The report says that New Zealand faces a number of "downside risks", and growth is projected to slow somewhat in the coming years.

"The election of a new government adds uncertainty to New Zealand's economic outlook. The policy mandate of the Reserve Bank of New Zealand is now to target employment and inflation, which is likely to lead to an increase in inflation in the short to medium term."

A prolonged period of low interest rates together with record immigration had led to a dramatic rise in house prices and high levels of household debt that pose a risk to the stability of the financial system.

"The new government has pledged to address this problem by banning property sales to foreigners, taxing speculative property buyers and increasing the housing supply," the report notes.

"While these policies may alleviate the problem of unaffordable housing, they could also trigger a marked slowdown in the housing market, which could suppress economic growth."

As New Zealand's top export destination, the continued slowdown in Chinese growth would also have an adverse effect on New Zealand's export sectors.

Australia, our second closest trading partner, would also be hit by a Chinese slowdown causing further knock-on consequences for the New Zealand economy.

"Another challenge is low productivity, which lags behind other OECD countries including Australia. This is partly due to a high rate of corporate tax that reduces capital investment as well as relatively low levels of research and development spending," the report says.

On the upside, good public infrastructure would continue to facilitate growth, with a comprehensive public transport system and substantial investments in renewable energy.

"The country has an ageing population like most of the developed world, but with a debt-to-GDP ratio of just 26 per cent it has plenty of room to deal with any increase in expenditure that may stem from this."