The BNZ is in the process of nudging its two-year GDP economic growth forecasts higher to reflect the stimulus recently imparted by the Government.
More importantly, head of research Stephen Toplis says, the BNZ remains deeply optimistic about the ongoing likely relative strength of New Zealand's future.
``That said, we strongly warn that businesses, householders, Government and investors alike need to better understand the capacity constraints New Zealand currently faces.''
In turn, they must recognise growth was likely to moderate, whether or not expected inflationary pressures arose.
A softening in economic growth looked almost inevitable, not because demand was set to weaken but rather because the economy was running out of the inputs required to keep expansion on track.
Demand was still there ``in spades'', Mr Toplis said.
Migration-led population growth was sitting near 2%, job creation was strong and the Government was easing fiscal policy through tax cuts, increased benefit payments and big increases in infrastructure spending.
Post-earthquake work was bolstering activity, construction was going from strength to strength and commodity prices, particularly dairy, were in the ascendancy.
The terms of trade was at near record highs and tourism growth was robust, he said.
Those major drivers were having multiplier effects throughout the economy and the overall level of activity was boosted by very low interest rates.
As expansion had been solid for so long, some cracks were appearing in the economy's ability to continue supporting persisting demands.
Capacity constraints included: labour being scarce; capacity utilisation variables being stretched; construction activity being thwarted by lack of inputs; tourism attractions were packed; hotels were full; commercial vacancy rates were low; dairy was environmentally challenged; requisite infrastructure was either creaking or absent; credit was in short supply and household debt levels were elevated.
The state of the labour market was, potentially, New Zealand's most binding constraint, he said.
The unemployment rate was 4.9% and the last time it was less than 4.9% was in December 2008.
No-one was certain where the non-accelerating rate of unemployment was but 4.9% must be getting close.
Past Reserve Bank estimates put it at 5% and the Treasury saw it at about 4.5%.
By comparison, the United States unemployment rate was 4.3% and the Federal Reserve seemed to think the rate was inflationary, Mr Toplis said.
``It is lower than New Zealand's rate but it is very important to note New Zealand's participation rate is exceptionally high, meaning in the event more labour is needed, there is very little to draw upon.''
New Zealand's participation rate was a record high of 70.6%. In the US, it was 62.7%, he said.
Many noted wage growth in New Zealand was weak and there must be more spare capacity than first thought.
The low wage numbers could not be denied and helped contain consumer price index inflation.
But it was clear labour constraints were having a tangible impact on business activity and were constraining the economy's growth rate.
A recent survey reported 41% of businesses were having difficulty in finding labour. A net 24% reported increased difficulty in finding unskilled labour.
Those readings were the highest seen since late 2007 and early 2008. Additionally, 15% of businesses reported labour was the single biggest constraint on increasing output.
Pressure on the labour market had been alleviated by very strong net migration inflows, Mr Toplis said.
In his view, those flows had now peaked and would soon start to moderate. If correct, that would adversely impact both supply and demand.
One area where migrant flows had been important was in the construction sector. Reduced flows could be problematic as there was strong anecdotal evidence there was not enough labour available in the sector to facilitate the construction activity the economy so desperately required, he said.
In the residential sector, supply was being affected by restrictive land supply practices, difficulties in permit processing, infrastructure deficits and Resource Management Act issues, to name a few.
While more houses were needed, so were more commercial buildings, as witnessed by low vacancy rates, more hotels and substantially more infrastructure development - all of which would put further pressure on the construction sector.
Exacerbating the demands on the broader construction industry had been the infrastructure and building damage caused by the Kaikoura earthquakes, Mr Toplis said.
Of the overall construction needs, the demand for new hotels highlighted the capacity constraints imposed by a rapidly growing tourism sector.
The annual average occupancy rate of New Zealand hotels had climbed to a record high 68.7%. During the recent peak, it hit a ``staggering'' 80.2%.
When New Zealand entertained major events such as the British and Irish Lions rugby tour, capacity was not there.
``There is increasing anecdotal evidence tour group activity - especially out of China - is also being adversely impacted by difficulties in getting appropriate accommodation.''
There were increasing reports of overcrowding on New Zealand's Great Walks and significant price escalation in key tourism venues such as Queenstown, he said.
It looked unlikely tourism growth could be sustained at recent high levels, in turn reducing services export growth and the spending through the broader retail sector.
Heightened tourism had brought with it increased environmental concerns as the current infrastructure struggled to cope with the increased waste management associated with higher numbers of people, Mr Toplis said.
In turn, there was the potential to adversely impact New Zealand's global image.
But it was not just tourism threatening to do that. Agriculture generally, and dairy specifically, would have the pace of its expansion increasingly curtailed by the costs associated with potential environmental degradation.
Eventually, the sheer availability, of land, or lack of it, could one day become a problem, he said.
``Putting all this together, it is not surprising businesses are increasingly citing a lack of capacity as the binding constraint on expanding output.''
