The New Zealand economy’s recovery from the stagnation of the last two years will remain patchy until mid-2025, according to Infometrics’ latest forecasts. Although the Reserve Bank’s interest rate cuts since August have finally provided some light at the end of the tunnel for Kiwis, 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 the easing in monetary conditions will not have an immediate effect on household budgets.

“Job vacancies have dried up this year, and by June 2025 employment growth will still be languishing at just 0.3%pa, as businesses consolidate their staffing requirements in the face of higher cost structures and weak demand conditions,” says Infometrics Chief Forecaster Gareth Kiernan. “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. But as people refix onto lower mortgage rates and more money is freed up for discretionary spending, we expect the economy to regain more 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% to 1.9%pa. This stronger performance is predicted to continue into the following year, with growth reaching 2.7%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, with an increased number of buyers in the market pushing house price inflation back up to over 5%pa. The residential construction industry will enjoy more stable demand conditions after three years of lower enquiry levels.

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 current 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 rate. Excluding the border closures during the COVID-19 pandemic, population growth of 0.2%pa in March 2027 would be the slowest since about 1986, and this shift will limit economic growth to an average of 2.1%pa between mid-2026 and mid-2028.

“Given the challenges currently faced by the New Zealand economy, the Reserve Bank’s interest rate cuts are not before time,” says Mr Kiernan. “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. But there is also a risk that larger and faster cuts going forward amplify next year’s economic upturn, as the Bank tries 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.”

ENDS

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