Despite New Zealand’s relative success in containing the COVID-19 pandemic, the country’s government, insurance and banking sectors are still feeling some ill effects, according to a report by S&P Global Ratings.
The ratings agency forecast New Zealand’s GDP growth to average 2.5% annually between 2022 and 2025. This is supported by the country’s low unemployment rate (3.3%), pent up demand from the pandemic, and a large pipeline of infrastructure and construction projects.
However, New Zealand is struggling with inflation, with a 32-year high of 7.3% in June, resulting in a policy interest rate of 3% in August. According to S&P, rates are likely to continue rising, with the Reserve Bank of New Zealand indicating that rates will peak at higher than 4% in 2023.
The construction sector is burdened by supply-chain issues, labour costs, and high demand, making construction projects more expensive. New Zealand’s capital goods price index grew by 12% for the first quarter of 2022. According to S&P, this metric is even higher for residential buildings, which grew 16.6% over the same period.
The insurance sector is predicted to continue dealing with claims inflation. P&C insurers are expected to maintain strong operating performance over the next two to three years, with a projected 8% premium growth for 2022, following 7% growth in 2021. This should cover claims pressure from higher natural hazard losses and claims inflation, S&P said.
The industry’s combined ratio deteriorated slightly to 88.3% in the first nine months of 2021, from 85.1% the prior year, and S&P expects it to remain between 87% and 90% over the next two to three years.
“The cost of natural hazard losses, especially from floods, have crept up over the past two years,” S&P Ratings said. “In addition, we expect claims inflation to remain high on the back of COVID-19 disruptions, the Russia-Ukraine war, and global supply chain issues – all ramping up the cost of repairs and replacement costs for everything from motor parts to building materials. On top of this, higher interest rates are taking their toll on bond values and mark-to-market investment returns for insurers. However, the resultant boost to profit from lower claims reserves for duration matched portfolios partially offsets this.”
