New Zealand's economic growth is set to continue to beat the average of the 35 member countries of the Organisation for Economic Cooperative and Development, as activity shifts away from consumption and towards investment, the OECD said in its biannual Economic Outlook.
The country's economic growth was "solid" in 2017, underpinned by consumption and international tourism, and "solid economic growth" is projected to continue at 3 per cent in 2018 and 2019, the OECD said in its latest report.
The organisation expects private consumption to slow due to lower net immigration and a moderation of wealth gains from house price increases.
Still, residential investment will remain supported by demand in Auckland and government funding through the KiwiBuild programme while government infrastructure spending is expected to rise and business investment spending tipped to recover from weakness at the end of last year as capacity remains tight, it said.
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Fiscal policy under the new Labour-led government is expected to shift to an expansionary stance, with spending increases from the provision of free tuition for the first year of tertiary education, a substantial pick-up in infrastructure and health spending and increased payments to students and families, the OECD said.
The additional spending doesn't threaten fiscal stability with government debt still declining as a share of GDP, it said. The OECD forecast government gross debt would fall to 35.6 per cent of GDP in 2019, from 35.7 per cent in 2018 and 36 per cent in 2017.
It expects the Reserve Bank to withdraw some monetary policy stimulus in 2019 through higher interest rates in order to slow inflation stoked by capacity constraints and increasing import prices from New Zealand's main trading partners. The consumers price index is seen running at 2.1 per cent in 2019, from 1.7 per cent in 2018.
"A sharp housing correction is the biggest downside risk, as household debt has risen to high levels relative to income, and most mortgagees have interest rates that are floating or will be repriced within two years," the report said.
"Conversely, short-term growth could be higher if housing shortages in Auckland trigger further price rises and associated wealth effects."
The OECD said projected increases in interest rates and government spending will improve New Zealand's macroeconomic policy balance and both should also serve to reduce housing market pressures.
Still, it said the resolution of infrastructure and planning constraints in Auckland is critical to easing affordability challenges, boosting weak productivity and avoiding a further house price breakout.