NZ rating will remain steady but robust economic growth could cool, S&P says

New Zealand’s economic growth to remain strong but did point to several factors that could cool it in the medium term, although it doesn’t expect to change its sovereign rating in the immediate future, says ratings agency Standard & Poor’s.

New Zealand’s economy has been growing “robustly” for quite some time and S&P expects that to continue, although “there are a few reasons it might start to slow down,” said Craig Michaels, director sovereign ratings at a briefing in Wellington.

Michaels said S&P does not expect to change its rating on New Zealand as the nation’s solid growth is offset by its external vulnerabilities. “We don’t see the rating going anywhere anytime soon,” he said. S&P’s foreign currency rating for New Zealand stands at AA.

Michaels noted that a key driver of economic growth has been migration into New Zealand, with a significant number of people returning or relocating from Australia. He said there are emerging signs, however, the employment situation in Australia might be starting to turn around with underemployment and unemployment easing and employment starting to tick up. The latest data showed Australia’s job market remained strong in June with unemployment close to its lowest levels in four years.

“I don’t want to overstate the strength at the moment, but it does look like its a bit of an inflection point,” he said. That could start to attract back some labour, which could crimp those migration numbers.

Another key driver of growth has been strong household consumption, which is partly due to the migration story but also because households are feeling more confident to spend than they have for a long time, said Michaels. Still, he noted households have been running down their savings to help fuel that growth, in particular given the lack of wage growth. There’s an “unsustainable” rundown in savings and “that may wind down to some extent over the next year or two,” he said.

While growth is “sound and robust” it might be “a little bit slower than what you been enjoying for the last couple of years,” he said.

Michaels noted the government still has significant room to move on fiscal policy if it needs to support the economy and the Reserve Bank “still has ammunition in its tank” to increase stimulus should there be any more external shocks. The central bank is widely expected to keep rates on hold at a record low 1.75 percent at this Thursday’s rate review and signal they will remain on hold for the foreseeable future.

However, the “Achilles heel” keeping a lid on the rating continues to be the high stock of debt owed to offshore investors, coupled with persistent and quite large current account deficits, said Michaels. “That is the thing that keeps us watchful on developments in New Zealand … we don’t think it is going to get any better,” he said.

Regarding the upcoming election, Michaels said the outcome won’t impact the rating as “we don’t see major differences in terms of the broad fundamental economic policies” the parties have.

“Sitting back we don’t think there are fundamental differences that would mean changes in the economic policy settings,” he said.

In terms of potential risks to both New Zealand and Australia he pointed to US trade policy but said China remains a key risk as the “underlying structural issues in China have not gone away.”

Michaels said while the Chinese government has put its “foot on the accelerator for economic growth” it may actually exacerbate the risk because of increasing indebtedness in corporate and local government. “This may not be a major issue in the next 12 months but in the next three-to-five years it will be very much on the table,” he said.

He also pointed to potential problems in Europe and said “I don’t think they are out of the woods yet.”

Michaels noted the extreme integration of the New Zealand and Australian banking systems means the two nations could be impacted at the same time should there be a major global event that impacts risk. “Both economies together could have been significant funding challenges in that environment,” he said.


NBR Business

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