Economy 'red-lining' as inflation begins to bite - Infometrics report

The economy is "red-lining" and continues to operate above capacity, with growth stifled by rising inflation and hard-to-find labour and materials.

Infometrics' March 2022 Quarterly Economic Monitor indicates annual economic activity rose 2.0 percent in the quarter, but underlying growth was struggling with volatility expected to continue over the next 12 months.

"It's harder and more expensive to find growth in 2022, with intense difficulties finding staff and materials across New Zealand," Infometrics principal economist and director Brad Olsen said.

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

The quarterly Infometrics report indicated some areas, such as Otago and West Coast had rebounded well from the weaker first summer of COVID-19 in 2020/21, while underlying economic growth was strongest in Hawke's Bay, Gisborne, and Tasman, 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."

He said rising inflation was forcing the Reserve Bank to lift 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 increased with each passing day.

"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."

He said high inflation and fuel prices had artificially added to spending growth, while underlying household spending activity was more subdued as inflation was 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."

Westpac's quarterly Economic Overview also found economic growth was set to slow in New Zealand and around the world, as central banks came to terms with what was needed to bring inflation under control.

"The challenge the Reserve Bank faces is in applying the right amount of pressure," said Westpac's Acting Chief Economist Michael Gordon.

"Too much, and it could inflict significant pain on household budgets and risk tipping the economy into recession. Too little, and inflationary forces could get out of hand, requiring an even more painful adjustment in the longer term."