New Zealand's economic recovery is under way, ratings agency Moody's says, but there are questions we will need to grapple with about rates caps and data centres.

It has released a new report on New Zealand's credit conditions and the forces that are combining for the country's economic recovery.

It said the country's strong institutions and robust regulatory frameworks, as well as the well-capitalised banking system, would help as the economy gradually recovered.

But cost of living issues, fiscal constraints and growing infrastructure needs would create different outcomes for different parts of the economy.

 

"New Zealand's economy is emerging from two years of stagnation with support from strong agricultural export prices, recovering tourism and the lagged effects of earlier monetary easing. However, elevated inflation and renewed monetary tightening will constrain household spending and business investment in the near term."

Moody's said it expected real GDP growth of 1.6% in 2026, and the potential for more if business confidence and investment intentions translated into stronger spending in the second half of this year.

It said growth would broaden to 2.3% in 2027 as external demand remained supportive and businesses step up investment.

But it said there were still clear risks to New Zealand, primarily from international forces. High oil prices earlier in the year had delayed rather than derailed the recovery, pushing up consumer prices and squeezing household incomes.

"The recovery is vulnerable to geopolitical tensions, global trade risks, El Niño conditions and election-related uncertainty.

"As a small, open economy, New Zealand's performance remains closely tied to global conditions. Agricultural exports will remain an important source of strength, with dairy, meat and kiwifruit prices likely to remain at or near historically high levels amid favourable global supply-demand conditions.

"Tourism, which is New Zealand's largest services export, will also continue to expand as sound income and economic growth in Australia and the US support visitor arrivals. Growing investment in data centres offers an additional source of economic activity beyond New Zealand's traditional export base."

Those data centres might be likely to particularly benefit organisations such as Transpower and Watercare, Moody's said.

Simplicity chief economist Shamubeel Eaqub said those companies would be able to make high profits if demand increased.

"It can have narrow benefits and broad costs."

Moody's said data centres would add at least 2.6 terawatt-hours to annual national electricity demand by 2035, taking total data-centre consumption above 3 terawatt hours.

"Data centres could also require around $NZ2.5 billion of additional generation investment and supporting transmission infrastructure."

Moody's expressed concern about the prospect of a rates cap. It said this, combined with fiscal pressure, would make it harder for councils to invest in infrastructure as they needed to.

"The central government's proposal to cap annual increases in property rates within an initial target range of 2% to 4%, first announced in December 2025, will further erode councils' fiscal flexibility, unless they are able to offset the constraint through other revenue sources or expenditure adjustments.

"Rates have accounted for 55% to 60% of aggregate local government revenue since fiscal 2019, and the ability to adjust rates without restriction has underpinned predictable operating revenue.

"The rates cap marks a significant shift in the institutional framework for New Zealand's local governments, signalling a more interventionist stance from the central government and a more restrictive operating environment.

"Councils, including Auckland Council, will face tighter constraints on revenue generation at a time when expenditure requirements are elevated because of persistent inflation, wage growth and infrastructure needs. The cap will limit councils' ability to adjust their largest and most predictable revenue source in response to cost or investment demands."

Moody's said the housing market was still weak and that was a risk but banks' strong capital, adequate provisioning and low mortgage losses would allow them to support the recovery through continued lending.