NZ economic outlook downgraded

The ratings agency has left the country’s sovereign rating unchanged at AA, but it has changed its outlook from positive to stable.

This is because it has revised down its assessment of New Zealand's near-term growth prospects, as the outlook for the prices of its agricultural exports have deteriorated.

It estimates GDP growth slowed to 2.3% in 2015 and expects GDP growth to pick up to 2.4% and 2.6% in 2016 and 2017.

Fitch analyst Mervyn Tang said this was a slower pace than forecast in their July 2015 review.

A slight rebound in business investment is expected, while ongoing high immigration levels should support consumption growth.

But this will be partly offset by lower dairy production and slower residential investment growth, Tang said.

“Stronger construction activity in Auckland will be unable to fully replace a decreasing contribution from the Canterbury rebuild.”

Further, uncertainty over the external environment, migration rates and the impact from El Nino weather conditions represent risks to the forecast.

The Reserve Bank has estimated that dairy losses would be manageable, even in a severe scenario, Tang said.

“However, this scenario does not assume a more broad-based economic slowdown, or any concurrent correction in the housing market.

“A combined stress scenario could have a much greater impact on the health of the banking system.”

While the ratings agency expects the RBNZ’s new LVR measures to slow house price growth, it said ongoing low interest rates and fast population growth could continue to add upward price pressures.

But a significant downturn in house prices could impact badly on New Zealand’s outlook.

Tang said one of the main factors that could lead to a further rating downgrade was a negative shock with a lasting impact on growth, employment, public finances and the banking system.

This could be a steep rise in external borrowing costs, prolonged weakness in the dairy sector, or a sharp reversal in house prices.

The other such factor would be evidence of net external indebtedness becoming unsustainable.

Meanwhile, HSBC has also predicted 2.4% growth for New Zealand in 2016.

The bank’s chief economist Paul Bloxham said that, although this was solid growth, it was below trend.

He also said that, despite strong tourist numbers and rising house construction in Auckland, low dairy prices will remain a challenge.

“Solid growth may not be enough to keep inflation on target, which means the Reserve Bank is likely to cut the OCR further, despite financial stability concerns.”

Fitch’s downgrade comes just before the RBNZ’s first OCR statement of the year tomorrow.

While the RBNZ is widely expected to leave the OCR unchanged tomorrow, speculation about further cuts this year – perhaps as early as March – is growing.