OECD says NZ Government should do more to curb inflation

Price rises are expected to slow, but inflation is forecast to stay above the Reserve Bank's 1-3 per cent target until 2025

The OECD has slashed its global economic growth outlook in a new report, The Price of War, which delivers a warning for New Zealand on inflation and recession risk.

While it says New Zealand's Reserve Bank is on track, it says the Government needs to do more to assist in the inflation fight. It argues for "more targeted spending", which could include delaying some infrastructure plans.

The OECD says New Zealand's growth outlook "remains solid" but warns of downside risks to the outlook - particularly if the Ukraine war and China's Covid response continue to cause inflation.

In its latest report, the international agency has downgraded its forecasts for global growth in 2022 to 3 per cent - down from its 4.5 per cent in December.

It has lifted its inflation forecasts and expects it to peak at 8.5 per cent this year in OECD countries before slipping to 6 per cent in 2023.

Its last forecasts in December saw global growth peaking at 5 per cent before gradually receding to 3 per cent in 2023.

In New Zealand, it sees GDP growth easing to 3 per cent in 2022 and 2 per cent in 2023.

"Economic growth will slow but remain solid as pent-up demand during the surge in Covid-19 infections in early 2022 is unleashed and gradual reopening of the border allows the tourism sector to recover," the OECD says in its commentary on New Zealand.

"High inflation and rising interest rates will weigh on private consumption."

While inflation will decline in 2023 it will likely remain high, as firms pass on global commodity price inflation and workers demand higher wages, the report says.

"In order to avoid fuelling inflationary pressure in the near term, any additional fiscal support against higher living costs should be more targeted," it says.

"The Government should also consider deferring some of its infrastructure investment."

On Reserve Bank policy the report said the faster increase in the OCR in the near term and the start of quantitative tightening were adequate and "signalled a strong commitment to price stability".

"Fiscal policy should avoid concentrating the burden of macroeconomic stabilisation on monetary policy, and support for households and businesses should be tightly targeted to those most vulnerable to high inflation."

While the baseline forecast sees New Zealand avoiding recession the report warns that "risks are tilted to the downside".

"An outbreak of a more virulent Covid-19 variant could stifle the recovery of private consumption," it says.

"A further escalation in the war in Ukraine and sanctions against Russia could bring about higher and more persistent inflation and weaker external demand. Prolonged lockdowns in large cities in China, New Zealand's largest export market, would also reduce exports and add to inflationary pressure by exacerbating disruptions in global supply chains."

Conversely, China's shift toward a less stringent Covid-19 policy would boost exports and alleviate supply chain disruptions.

Successful reopening of borders could be key to New Zealand's short-term outlook, the report says.

"To ease inflationary pressure and skills shortages in the near term, the government should facilitate the inflow of migrant workers after the full border opening in July 2022 by ensuring the smooth implementation of the new work visa and employer accreditation system."

The OECD also noted the Government's efforts to tackle supermarket prices.

"Concrete policy actions to enhance competition in the retail grocery sector are warranted," it said.