[Source: RNZ]

The government needs to be more targeted in its spending to relieve the cost of living pressures and should consider delaying some infrastructure projects, according to the Organisation for Economic Co-operation and Development.

In its latest global economic outlook, the OECD has slashed its world growth forecasts and increased inflation estimates, saying the war in Ukraine has made the growth outlook far more bleak.

“Russia’s war is indeed posing a heavy price on the global economy,” OECD Secretary General Mathias Cormann told a news conference.

The six-monthly OECD report said New Zealand’s outlook was solid with growth of 3 percent this year and 2 percent next year, with inflation falling to 4.6 percent next year.

“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 report said.

“Inflation will decline in 2023 but remain high, as firms pass on global commodity price inflation and workers demand higher wages.”

However, it had advice for the government on how to steer the economy through the current rough period.

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

The government should also consider deferring some of its infrastructure investment.”

Among its other suggestions for New Zealand were an opening up of immigration to tackle skills shortages, and “swift and concrete” action to improve supermarket competition.

But the OECD also warned that the risks to New Zealand were to the downside, with an outbreak of a more virulent Covid-19 variant stifling household spending, along with any escalation in the Ukraine war and prolonged lockdowns in China.

The downbeat tone of the OECD global report mirrored that of the World Bank earlier in the week.

It cut its forecast for global growth to 3 percent this year from its 4.5 percent estimate in its forecasts in December, and for next year to 2.8 percent, down from a previous forecast of 3.2 percent.

Despite the lower growth and higher inflation outlook, the OECD saw a limited risk of “stagflation” like that seen the mid-1970s, when the oil price shock triggered runaway inflation and surging unemployment.

It said developed economies were much more driven by services and less energy-intensive than in the 1970s and central banks had a freer hand to fight inflation, independent of governments more concerned about unemployment.

“We concede there are a lot of downside risks but we are not projecting a recession and we do not at this point think that stagflation is the right way to describe what is taking place,” Corman said.