KEY POINTS:
The OECD today warned tax cuts or new Government spending threatened New Zealand's export-led economic recovery and the likelihood of interest rate cuts.
"Additional fiscal stimulus, whether in the form of tax cuts or additional spending, would reduce the room for lower interest rates and inhibit the transition
to export-led growth," the Organisation for Economic Co-operation and Development (OECD) said in the New Zealand section of its six-monthly report on the world economy.
"This would make the challenges of macroeconomic stabilisation more difficult at a time when the outlook is subject to considerable risks," the Paris-based think tank said.
Dissipating inflationary pressures should allow room for significant cuts to interest rates next year, which could also induce a currency depreciation and thereby reduce the external imbalance over time, the report said.
However, that scenario could be threatened by fresh fiscal stimulus.
It welcomed the economic slowdown this year that had helped eliminate excess demand pressures.
The projected pick-up in the pace of activity was likely to be modest, as the shift towards export-led growth was hampered by the exchange rate appreciation since the middle of the year, it said.
"Nevertheless, moderate real disposable income growth will allow private consumption to gently accelerate."
Employment is projected to stabilise, but the rise in the unemployment rate would be attenuated by some labour market withdrawal.
It picked economic growth would fall even further next year to be just 1.3 per cent from 1.5 per cent in 2006.
Even in 2008, the economy was picked to grow below its 3-3.5 per cent potential at just 2.0 per cent.
It forecasted the inflation rate, currently at 4 per cent, would ease to 2.8 per cent next year, then to 2.0 per cent in 2008.
Unemployment was forecast to rise to 4.4 per cent next year from 3.8 per cent at present, then to 4.6 per cent in 2008.
The report showed the New Zealand economic performance was well below the OECD average.
It forecast leading economies would grow strongly by 3.2 per cent this year but slow to 2.5 per cent next year on a soft patch in the United States.
The report painted a picture of the US economy slowing and the eurozone performing unexpectedly strongly in the short term.
"All considered, the outlook for the OECD area remains favourable," the OECD said.
The 30 OECD countries would show growth of 3.2 per cent this year, slightly higher than the last forecast in May of 3.1 per cent.
It reassured that house prices and the huge US external deficit should steady, but warned that this could go wrong and then a sharp fall of the dollar, rise of interest rates and housing downturn might feed each other.
- NZPA