A leading international credit rating agency has downgraded its outlook for New Zealand's economy, saying it doesn't expect growth to be as strong as previously thought.

Fitch Ratings has affirmed its AA credit rating for New Zealand, but says the outlook for our agricultural exports means future growth won't be quite as strong.

The report from Fitch said GDP growth for New Zealand was still expected to pick up to 2.4 per cent and 2.6 per cent in 2016 and 2017 respectively - a slower pace than it forecast in its review in July last year.

Business investment was expected to experience a slight rebound, according to Fitch.

Advertisement

"We assume this will be partly offset by lower dairy production and slower residential investment growth, with stronger construction activity in Auckland unable to fully replace a decreasing contribution from the Canterbury rebuild," the report said.

Uncertainty over the external environment, migration rates and the impact from El Nino weather conditions were identified as risks.

The downgrade comes ahead of tomorrow's Reserve Bank policy review, which is expected to keep the official cash rate at a record low 2.5 percent. Economists anticipate governor Graeme Wheeler will have to drop his neutral bias later this year as cheap oil looks set to keep inflation below the 2 percent mid-point goal of the central bank's target band.

READ MORE:
Westland Milk's 'grim news' for farmers
Fonterra sees more dairy farmer pain before revival

The Reserve Bank estimated dairy losses would be manageable, but Fitch said a broad-based economic slowdown, including a correction in the housing market, would have a much greater impact than the bank had planned for.

After the government's first budget surplus in seven years was met last year, Fitch predicted a deficit for the government in FY16, followed by lower surpluses than previously forecasted by the government.

A sharp reversal in house prices and prolonged weakness in the dairy sector could lead to further credit rating downgrades, Fitch said.

Fewer people are expecting house prices to rise and the trend is particularly marked in Auckland.

The latest ASB Housing Confidence Survey out today showed a 25 per cent drop in the number expecting rises.

READ MORE:
Fewer expect NZ house prices to rise
BNZ lifts 2016 growth forecast after robust data

The fall in net house price expectations is most pronounced in Auckland, where net price gain expectations fell to 30 per cent from 50 per cent last quarter.

BNZ economists this week revised up their 2016 forecast for gross domestic product growth to 2.4 per cent from a previous projection of 1.9 per cent, on expectations for a bigger cycle in net immigration and the sharp rebound in the domestic growth indicators over recent months.

The government's accounts for the first five months of the financial year released yesterday showed the Crown's operating deficit was wider than expected with the tax take running below expectations, though Treasury officials predicted some of that would reverse in later months.

-With BusinessDesk