Recovery on the horizon as rate cuts take effect
New Zealand’s economy will stay sluggish in the first half of 2025, with recovery expected to pick up momentum later in the year, according to Gareth Kiernan (pictured above), Infometrics chief forecaster.
Although the Reserve Bank has initiated interest rate cuts since August, the benefits for households will be delayed due to a high share of mortgages locked in fixed rates.
“A further rise in the unemployment rate, to a peak of 5.4% in mid-2025, will weigh on people’s job security and willingness to spend,” Kiernan said.
Gradual economic improvement expected in late 2025
Employment growth is expected to remain flat, rising only 0.3% per annum by mid-2025 as businesses adjust to weak demand and rising operational costs.
However, GDP growth has been revised upwards, with forecasts now predicting a 1.9% annual increase by late 2025, continuing into 2.7% by mid-2026.
According to Kiernan, the economic recovery will gain momentum as mortgage holders refinance at lower interest rates, freeing up funds for discretionary spending.
“We expect the economy to regain more momentum during the second half of next year,” he said.
Agriculture and housing to drive recovery
Parts of New Zealand’s agricultural sector are likely to benefit from lower production costs and improved export prices in 2025, with gains expected in dairy and beef markets. The housing market is also set for a modest rebound, with house price inflation projected to exceed 5% per annum as lower debt-servicing costs attract more buyers.
The residential construction sector will stabilise after years of subdued activity, helping support growth.
Risks remain amid weak migration and fiscal constraints
Despite the improved outlook, net migration is expected to decline sharply, potentially turning negative by 2026 as more New Zealanders seek work in Australia, where unemployment rates are forecast to remain lower.
Infometrics warns that population growth may slow to just 0.2% per year by 2027, limiting longer-term economic performance.
Additionally, government spending will remain restricted as fiscal outcomes continue to lag behind targets, making a return to budget surplus unlikely for several years.
“Given the challenges currently faced by the New Zealand economy, the Reserve Bank’s interest rate cuts are not before time,” Kiernan said.
Reserve Bank faces balancing act
Kiernan also warned that the Reserve Bank may need to tread carefully. He suggested that further easing of at least 50 basis points before Christmas is possible but noted the risk of accelerating the recovery too quickly.
“There is a risk that larger and faster cuts going forward amplify next year’s economic upturn,” he said.
While the interest rate cuts are necessary, Kiernan added that the Reserve Bank’s recent policies have contributed to the economy’s volatility.
“The bank has already exacerbated the economy’s ups and downs over the last four years, ultimately creating more hardship for businesses and households than might otherwise have been necessary,” the Infometrics economist said.
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