Economy headed for a fall, says OECD

New Zealand's economy could be headed for a hard fall, a report by the Organisation for Economic Cooperation and Development (OECD) says.

The Paris-based organisation said the economic growth rate was expected fall to 2.8 per cent in 2005, down from 4.4 per cent last year.

Monetary tightening by Reserve Bank Governor Alan Bollard had failed slow domestic demand growth, the OECD economic outlook said.

The OECD paper examined the rise in house prices, and current valuations against a range of benchmarks.

It reviewed the possibility of a possible correction of housing prices and real activity.

Dr Bollard last month issued a severe warning of imbalances and "significant excesses" developing in the economy.

He warned the uptrend in house prices "would not be sustained". An outright fall in house prices was likely.

He also said the exchange rate "appeared to have reached an unsustainable level".

The report said New Zealand was one OECD country where the cost of housing and rent had risen much more rapidly than incomes.

In New Zealand the proportion of household income required to pay the interest on mortgages had been trending upward "reflecting the increased size of mortgages".

In 1992 mortgage debt was 67 per cent of disposable household income. In 2003 it had risen to 129 per cent.

Only the Netherlands of 15 OECD countries listed was higher than New Zealand.

The risks of a sharp correction to the economy were increasing, the OECD said.

The Reserve Bank may need to further tighten monetary policy .

In its May economic outlook, the OECD said New Zealand was one of the world's top performers over the past two years.

While the economy was slowing down as higher interest rates took effect it was headed for a soft landing, the OECD said.

- NZPA