Ratings agency S&P gives NZ economy big thumbs-up despite current account

S&P says NZ's economic outlook was stable. Photo / NZME

International ratings agency S&P Global says New Zealand "managed the pandemic better than most countries in terms of health, fiscal, and economic outcomes".

S&P has affirmed its "AA+/A-1+" foreign-currency and "AAA/A-1+" local-currency sovereign credit ratings for New Zealand.

It saw the economic outlook as "stable" despite today's data showing a large current account deficit.

The country's latest current account data was released today showing a $7.1 billion deficit in the June 2022 quarter, down $1.7b from the previous quarter.

Despite the deficit narrowing in the autumn and early winter, the country's annual current account deficit was $27.8b in the year to June 30.

The report comes ahead of GDP data due on Thursday (10.45am) which should reveal whether the economy avoided recession in the first half of the year.

"New Zealand's economy is performing well, underpinned by low unemployment and pent-up demand," S&P said.

"This is despite the after-effects of the Covid-19 pandemic, and rapidly rising inflation and interest rates."

S&P expected a "strong rebound in economic activity and the ceasing of pandemic related-support measures to narrow New Zealand's fiscal deficit from pandemic highs".

This would ease pressure on the Government's debt trajectory even as debt servicing costs rise reflecting global interest rates, it said.

The ratings agency presented both downside and upside scenarios that could change that outlook.

"We could lower our ratings on New Zealand if the fiscal deficit does not narrow as we forecast and interest costs rise substantially to more than 10 per cent of Government revenues," it said.

"We could also lower the rating if the country has persistently weak current account deficits of more than 20 per cent of current account receipts."

"This would reduce the Government's headroom at the current rating to address potential macroeconomic and financial sector risks, should they materialise."

S&P noted that it could also raise the ratings if the "general Government deficits are consistently less than 3 per cent of GDP and net general government debt or interest expenses are structurally less than 30 per cent of GDP and 5 per cent of government revenues respectively".

Those improvements could mitigate risks associated with the country's property market and financial system at a higher rating level, it noted.

S&P forecasts New Zealand's real GDP growth will average about 2.5 per cent a year between 2022 and 2025.

"Growth will be supported by strong employment conditions, pent-up demand from the pandemic, and a large pipeline of infrastructure and construction activity," it said.

"Local governments across the country have substantially increased infrastructure budgets. The unemployment rate of 3.3 per cent in June 2022 is very low in New Zealand's context, and is adding to capacity constraints the economy is experiencing."

Surging inflation presented a downside risk to those forecasts.

Inflation hit 7.3 per cent in June 2022.

S&P said it expected higher interest rates to achieve their intended consequences and tame excessive demand, bring down inflation, and ease pressure on house prices.

"The moves are already resulting in falling house prices and will, over time, slow consumption," the report said.

High property prices and record household debt remained risks to the economy if the real estate market weakens materially, it warned.

"However, this is not our expectation. We believe the sovereign has headroom at the current rating to address the current price correction."