The economy faces a year or more of tepid growth but could find itself in a deeper recession for longer if inflation is not brought under control or government spending blows out, according to the International Monetary Fund (IMF).
In the final version of its annual report on the country, it said the full effects of the Reserve Bank's (RBNZ) interest rate rises were still working their way through the economy to bring about the necessary slowdown, and overall policy had to remain tight.
"Given the pressing capacity constraints and high and persistent inflation, the monetary and fiscal policy mix must strike a restrictive bias to rebalance the economy - internally and externally," the report said.
But it warned there were dangers if government spending was too high and/or the RBNZ raised interest rates higher to tackle stubborn inflation, adding up to an outlook which was "highly uncertain".
"The environment of tighter domestic financial conditions and higher rates will increase the risk of disorderly conditions in the housing market, which would have significant consequences for household consumption and overall growth and could result in a prolonged or deeper recession."
It estimated growth over 2023/24 would be about 1 percent, but inflation would not return to the 1-3 percent target band until 2025, and it continued to warn about the high current account deficit, which eased to 8.5 percent of GDP in the first quarter, which it said added to the country's vulnerabilities to global shocks.
The IMF also said risks such as the slowing housing market appeared to be contained although the weaker market would weigh on spending and economic growth.
But it reaffirmed that housing affordability was a continuing problem, which falling house prices had not improved and needed to be addressed by increased supply of new houses.
Tight control
The IMF said for the future, the government needed to concentrate on the short-term need of rebuilding after the floods and cyclone, while not adding to the stimulus in the economy.
"Fiscal policy should help address overheating while managing cost pressures and post-cyclone spending needs.
"Over the medium term, a careful balancing and prioritisation is needed to address long-term, structural needs such as closing productivity gaps and investing in climate change-related projects," it said.
The RBNZ was advised to concentrate monetary policy on tackling inflation.
For the longer term, the IMF said targeted government spending would be needed to tackle the challenges of climate change, education, and freeing up the labour market, as well as tax reform including capital gains and land taxes, and a lower company tax rate.
However, the report said the government's financial rules, which set debt limits and government spending targets, gave it sufficient headroom to cope with most shocks.
RNZ
