Fitch Solutions downgrades New Zealand GDP outlook

Export growth is one bright spot in the 2023 outlook. Photo / Supplied

International research agency Fitch Solutions has downgraded its outlook for New Zealand’s economy, following last week’s larger-than-expected GDP contraction.

“Following the latest GDP data release, we have revised down our 2023 full-year real GDP growth forecast to 1.1%, from 1.5% previously,” Fitch Solutions said in a new report today.

Last week StatsNZ data showed the economy contracted 0.6 per cent in the December quarter, a bigger fall than expected, raising the likelihood New Zealand is already in a technical recession.

Rising debt-servicing costs and lower house prices would constrain private consumption, the report said.

Fitch Solutions still sees the Reserve bank lifting the OFffical Cash Rate by another 50 basis points - taking it to a peak of 5.25 per cent.

Some of New Zealand’s local bank economists have pulled back their expectations of the OCR and now expect a peak of just 5 per cent.

That’s based on a gloomier local outlook for GDP.

Most local bank economists expect the country to slip into recession in the second half of the year with a flat or marginally negative forecast for full-year growth.

Fitch Solutions is a separate and distinct division from Fitch Ratings, within the Fitch Group.

Therefore the downgrade doesn’t have a direct bearing on New Zealand’s credit rating

But the Research report notes that the “impact of rising interest rates is significant for New Zealand given that household debt stood at 95.1 per cent of GDP (as of Q3 2022), higher than the average of 72.9 per cent for advanced economies.

“Meanwhile, house prices in January 2023 (as proxied by the REINZ real estate price index) have declined by 16.2 per cent since its peak in November 2021, lowering homeowners’ wealth.”

Fitch Solutions also sees the labour market softening further and weighing on household consumption.

“Firms are already signalling that they will be scaling back hiring as the economy slows,” it said.

The job vacancy index had fallen by 17.3 per cent since its peak in May 2022.

Fitch Solutions now forecasts unemployment to rise to an average of 3.9 per cent in 2023 - from 3.3 per cent in 2022.”

Data out last week also showed New Zealand’s current account deficit blowing out to $33.8 billion (8.9 per cent of GDP) in the 2022 year - the largest deficit-to-GDP ratio since the series began in March 1988.

Fitch Solutions noted that softening domestic demand was likely to see import growth slow to 0.3 per cent in 2023, versus 4.4 per cent in 2022.

“Meanwhile, we are expecting exports to increase slightly by 1.2 per cent in 2023, after three straight years of contraction from 2020-2022,” it said.

“We believe that exports should benefit from the reopening and economic rebound in Mainland China, which is New Zealand’s largest export destination. Nevertheless, the boost will be somewhat offset by a weakening external demand elsewhere and adverse weather conditions domestically.”