Weaker data won't lessen focus on credit rating, ANZ economist says
Sunday, 18 June 2023
New Zealand’s credit rating is front of mind for ANZ economist Henry Russell after a week of weak economic data.
Russell gave his insights on Friday, at the end of a week in which it was confirmed the country had technically entered a recession, and a report card from the International Monetary Fund (IMF) advised New Zealanders to prepare for sustained inflation.
There was plenty of new information to get through – the country’s GDP dropped 0.1% in the first quarter of the year, making it the second negative quarter in a row.
And the IMF said the Reserve Bank’s official cash rate hikes from 0.25% to 5.5% would be felt throughout the year and into next.
But it was warnings, like that from Standard & Poor’s from March, that Russell came back to.
The rating agency said New Zealand’s credit rating could be reduced if the current account deficit did not improve.
This, combined with recent data showing the Government’s Crown accounts had already slipped below the Treasury’s Budget projections due to a shortfall in tax revenues, was a reason for concern.
Its operating (Obegal) deficit for the 10 months to the end of April was almost $1.3 billion or 22% above forecast at just over $7b, versus the Budget forecast of a $5.7b deficit.
“If they [rating agencies] don’t see a narrowing in the deficit across the next 12 to 18 months then New Zealand wil be at risk of a downgrade,” Russell said.
A downgrade could make it harder for the Government to borrow money, or it would have to pay higher interest rates on money borrowed.
“We may face something called a sudden stop in capital flows, and that kind of materialises in a sharp correction in the currency and both the government and households would have to suddenly rein in their consumption and start saving more, and that has a material impact on wellbeing, or can do.”
Following Stats NZ’s announcement that the country had entered a technical recession, BMI, a unit of ratings agency Fitch Solutions, predicted the economy would expand by just 1% in 2023, as the squeeze from restrictive monetary policy, high inflation and weak sentiment intensified.
”While we think that the Reserve Bank of New Zealand is already done with monetary tightening, we do not anticipate any cuts to interest rates this year due to high inflation,” BMI wrote.
”New Zealand families are highly leveraged, and thus exposed tightened monetary conditions, with negative implications for current and future consumption.
“A struggling private sector is also contributing to our bearish outlook on the economy.”
ANZ continued to forecast that the Reserve Bank would have to increase the OCR again by 0.25% in November.
That was despite the Reserve Bank advising interest rates had peaked at their current level of 5.5%.
On the current recession, Russell said it was hard to reconcile a technical recession with unemployment that remained very low, but the bank was expecting unemployment to rise in time.
Russell had another warning to add to those of the IMF and Standard & Poors – the spectre of a housing resurgence that happened too quickly.
If prices recovered too quickly, Russell said, that would add to consumer confidence, which could mean more spending and possibly higher inflation, and the Reserve Bank would likely respond with additional interest rate hikes.
“The majority of Kiwis' wealth is tied to housing, so that’s what affects their confidence, and therefore their spending.”
BMI painted a gloomier picture for the housing market, stating “outright declines” in the construction and real sectors would likely occur later this year given their sensitivity to interest rates.
ANZ predicting return to more normal migration rates
Stats NZ data shows that in the year to April there were 171,800 arrivals to New Zealand, up 208% on the same time a year earlier.
There were 99,500 migrant departures, up 33%, creating an estimated net migration gain of 72,300 for the year.
Russell said ANZ expected that figure to taper off as pent-up demand dissipated.
“We have started to see a bit of evidence of that in April,” he said.
He said the surge in arrivals also had not yet been mirrored in the numbers departing, which was expected to eventually happen.
“We expect that to track up across the year just as the arrivals start to come off.”
“That’s going to bring net migration to a more normal level.”
The IMF also suggested some tax reforms, with less corporate and personal tax, and broadening the tax base to include capital gains and land taxes.
Russell said New Zealand was unusual for having a lot of tax taken from wages and GST, but voters would ultimately decide whether a greater part of the pie should one day come from more taxes being levied against property or land.