According to Infometrics' latest forecasts, the New Zealand economy’s recovery from the stagnation of the last two years will remain patchy until mid-2025.
Although the Reserve Bank’s interest rate cuts since August have finally provided some light for Kiwis at the end of the tunnel, continued increases in the unemployment rate will mean households remain cautious in their spending decisions over the next nine months.
The high proportion of mortgage lending on fixed rates also means that easing monetary conditions will not immediately affect household budgets.
“Job vacancies have dried up this year, and by June 2025, employment growth will still be languishing at just 0.3 percent pa, as businesses consolidate their staffing requirements in the face of higher cost structures and weak demand conditions,” said Infometrics Chief Forecaster Gareth Kiernan.
“A further rise in the unemployment rate, to a peak of 5.4 percent in mid-2025, will weigh on people’s job security and willingness to spend. But as people refix onto lower mortgage rates and more money is freed up for discretionary spending, we expect the economy to regain momentum during the second half of next year.”
Although Infometrics forecasts the economy to remain weaker through the first half of next year, expected GDP growth by the end of 2025 has been revised up from 1.5 percent to 1.9 percent pa. This more robust performance is predicted to continue the following year, with growth reaching 2.7 percent pa by mid-2026.
Parts of the agricultural sector will contribute to the recovery, as lower costs and better export prices improve profitability for dairy and beef farmers.
A modest pick-up in the housing market is also likely during 2025 as debt-servicing costs reduce. An increased number of buyers will push house price inflation back to over five percent pa.
After three years of lower enquiry levels, the residential construction industry will enjoy more stable demand.
But it will not all be plain sailing for the economy. Government spending will remain constrained for the foreseeable future, with fiscal outcomes still worse than expected and the return to surplus several years away.
More broadly, the lack of job vacancies is causing a sharp reversal in net migration, with fewer arrivals being compounded by more people seeking opportunities in Australia.
Infometrics forecasts that annual net migration will slip to about 16,000 by the end of 2025 and turn negative during 2026/27 as Australia’s unemployment rate remains below New Zealand’s.
Excluding the border closures during the COVID-19 pandemic, population growth of 0.2 percent pa in March 2027 would be the slowest since 1986. This shift will limit economic growth to an average of 2.1 percent pa between mid-2026 and mid-2028.
“Given New Zealand's challenges, the Reserve Bank’s interest rate cuts are not before time. With inflation already just shy of the Bank’s target midpoint, there is scope for further easing, with another cut of at least 50 basis points before Christmas,” said Kiernan.
“However, there is also a risk that larger and faster cuts going forward will amplify next year’s economic upturn as the Bank will try to make up for being behind the curve. 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.”
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