People shop at a supermarket in Wellington, New Zealand, on July 18, 2022. (Xinhua/Guo Lei)

 
The New Zealand economy is grappling with headwinds, primarily high inflation and rising interest rates, according to a report by the New Zealand Institute of Economic Research.

These challenges add to continued labor shortages, with the impact of the COVID-19 pandemic still evident, particularly in the services sector. These factors are weighing on the economic recovery, with signs of slowing activity across many industries, the institute's principal economist Christina Leung said on Wednesday.

"Cost pressures remain intense for households and businesses, and this is driving pessimism," Leung said, adding that central banks around the world have responded to the surge in inflation by increasing interest rates at a rapid clip.

"While this is having the intended dampening effect on demand, there are concerns activity will slow to the point of pushing economies into recession," she added.

The increase in interest rates has had the most immediate effect on the housing market, with the number of house sales falling and an easing in house prices.

The latest retail sales data show a slowing in retail spending, and this is expected to continue as households hunker down to weather these latest headwinds of rising living costs and increased mortgage repayments, Leung said.

Despite these headwinds, there remain factors supporting the recovery ahead. These include continued growth in incomes, emerging signs that cost pressures are starting to ease, particularly with the recent decline in fuel prices, according to the report.