Cautious optimism characterizes New Zealand’s economic prospects for 2025. Following a contraction in 2024, efforts by the Reserve Bank to address inflation and subsequent interest rate reductions have begun to restore confidence among businesses and consumers. The anticipated continuation of rate cuts, combined with reduced mortgage repayments for many households, suggests a gradual recovery. However, structural challenges, such as slow labor productivity, an aging population, and a delayed return to a budget surplus, temper expectations. Global uncertainties, including geopolitical risks, further complicate the outlook, but there remains hope for steady progress in the coming year.
Throughout 2024, the focus for many in New Zealand revolved around when interest rates would decline after a prolonged period of increases. Since late 2021, central banks worldwide, including the Reserve Bank of New Zealand, raised rates to combat inflation. This tightening of monetary policy successfully curbed demand and brought inflation under control to varying extents across major economies. In New Zealand, these efforts reduced the annual Consumer Price Index (CPI) inflation from a peak of 7.3% in June 2022 to 2.2% by September 2024. Despite this significant progress, non-tradable inflation remained elevated at 4.9%, highlighting persistent risks to inflation stability.
A key indicator of future inflation, the two-year-ahead expectations measure from the Reserve Bank’s Survey of Expectations, dropped from 3.6% in late 2022 to 2.1% by late 2024. This decline signals a reduced risk of inflation expectations drifting away from the Reserve Bank’s target range of 1–3%.
Economic activity data for 2024 painted a less optimistic picture. Gross Domestic Product (GDP) contracted by 1% in the September quarter, following a 1.1% decline in the June quarter. This broad-based downturn across sectors reflects the impact of higher interest rates on demand. Despite upward revisions to GDP levels in recent years, the sharp drop in activity underscores the loss of economic momentum.
The Reserve Bank’s ability to bring inflation back within its target range allowed for the initiation of monetary easing. The Reserve Bank reduced the official cash rate (OCR) by 25 basis points in August 2024, and then again by 50 basis points in October and November. The central bank has signaled the likelihood of additional rate reductions throughout 2025. These lower rates have fostered increased confidence among households and businesses, as many anticipate further relief in borrowing costs.
The repricing of mortgages has played a significant role in this recovery. Historically, the effects of OCR changes took approximately 18 months to permeate the broader economy due to fixed-term mortgage arrangements. However, Reserve Bank data indicates that over half of New Zealand’s mortgages are set for repricing by mid-2025, accelerating the transmission of OCR cuts to the economy.
On the fiscal front, the government’s financial outlook deteriorated in the Treasury’s December 2024 half-year update compared to earlier projections in May. The prolonged economic slowdown and weak labor productivity have led to lower tax revenues, further delaying the return to a budget surplus. The update projects a surplus by June 2029, a year later than previously anticipated. Meanwhile, an ageing population and a softer labor market continue to drive up expenditure on superannuation and benefit payments.
The building sector exemplifies optimism. Despite current subdued demand, the December NZIER Quarterly Survey of Business Opinion revealed that a net 29% of firms in the sector expect economic conditions to improve. Lower interest rates are expected to stimulate demand in construction, fostering a brighter outlook for the sector.
Globally, uncertainties persist. Ongoing geopolitical tensions, such as the wars in Ukraine and the Middle East, raise concerns about oil supply and broader economic stability. Additionally, protectionist trade policies remain a looming threat. Discussions around tariffs, particularly in the United States, could disrupt global trade flows. Despite these challenges, declining interest rates worldwide are anticipated to support a gradual recovery in economic activity, offering a positive outlook for households and businesses alike.
In summary, while New Zealand faces several headwinds, including structural and global challenges, the foundations for recovery in 2025 are steadily forming. The combined effects of lower interest rates, improved consumer confidence, and sector-specific optimism provide hope for a balanced economic resurgence.
