The New Zealand economy faces continued difficult conditions throughout the next 12 months according to Infometrics’ latest forecasts, with increased caution from businesses around investment and hiring in response to weakening demand. Reduced job and income security is becoming a major drag on consumer confidence, supplanting rising interest rates and cost-of-living pressures as the biggest concern for households. Further rises in the unemployment rate, from 4.3% currently to 5.3% in mid-2025, will continue to limit spending during the next year.

“Household budgets remain under pressure from high mortgage rates, although debt-servicing costs are now close to peaking,” says Infometrics Chief Forecaster Gareth Kiernan. “But job losses are looking more likely in parts of the economy where demand is falling away, such as retail and hospitality, construction, and some areas of professional services. Consumers will look to shore up their financial position by further reining in discretionary spending through into 2025.”

The latest inflation data has confirmed that price pressures across much of the economy are being reduced by weak demand, and inflation is set to be back within the Reserve Bank’s 1-3%pa target band by the end of this year. But despite last week’s more dovish statement, the Bank’s monetary policy approach is confused and might still not be forward-looking enough – the same shortcoming that occurred when interest rates needed to be lifted in 2021 and 2022. Although there is a rising chance of an interest rate cut in November, Infometrics currently expects it to be February 2025 before the Reserve Bank starts to lower the official cash rate.

“There will be a sense of relief from mortgage holders when interest rates are actually cut by the Reserve Bank, as opposed to the market speculation since early 2023 of the possible timing,” says Mr Kiernan. “But the full effects of the rate cuts on economic activity will take up to 18 months to be felt. The Reserve Bank’s overly cautious approach will unnecessarily prolong the economy’s stagnation.”

With the government’s most recent Budget proving to be less contractionary than anticipated, fiscal policy will need to stay tight for longer over the next few years to get the government accounts back into surplus. Internationally, there are some signs of improvement in commodity prices and the global economy, but prospects for exporters remain patchy due to China’s economic struggles, ongoing conflict, and risks around more protectionist trade policies.

“All these factors point to a slower recovery in the economy during 2025 and 2026 than we had previously hoped for,” says Mr Kiernan. “We are forecasting year-end GDP growth of just 1.5% in 2025 and 2.5% by the end of 2026. That outlook results in a 1.2% reduction in GDP per capita between 2022 and 2026, meaning that we will all be worse off than four years ago.”

ENDS

More details about Infometrics forecasts can be found on the respective Building and Transport forecasts pages on the Infometrics website.