Finally, some good news! The economy looks poised to recover this year, albeit only moderately.

In its budget policy statement for 2025, the government reports that the economy is emerging from the protracted recession and a turning point has been reached.

It notes: “Annual inflation is back in the target band and close to the 2% midpoint. The Reserve Bank of New Zealand (RBNZ) has begun reducing interest rates with the official cash rate down 125 basis points since August. As interest rates fall, household spending and business activity is expected to lift.”

ANZ chief economist Sharon Zollner says her bank’s consumer confidence and business outlook surveys suggest that the economy has pulled off an impressive turnaround in the last three months of the year.

Things are clearly improving, which was a positive note to end 2024 on, she says.

“The big question for the year ahead is not if the economy will recover, but rather, how fast,” she adds.

“With interest rates slowly coming down, it’s reasonable to expect 2025 will be a better year than 2024. But it’s worth bearing in mind there are still some sticky elements to the inflation picture,” says Zollner.

“In my view, there’s nothing set in stone about the RBNZ’s easing path and the central bank will continue to feel its way from here.”

A patchy uptick

Kiwibank’s economists believe the first half of 2025 will be a bumpy ride with glimpses of growth, but the second half will see an uplift in activity as interest rates fall further.

They note that costs are becoming more manageable for many businesses and profitability is improving as a result. But while Kiwibank’s economists forecast that the economy will grow 2.2% by the end of 2025, up from flat growth in 2024, they expect a further deterioration in the labour market as it adjusts to the recent weakness in the economy.

Gareth Kiernan, chief forecaster and a director at Infometrics, predicts continued rises in the unemployment rate will temper household 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,” he says.

“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,” says Kiernan.

“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.”

Kiernan explains that 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.

Challenges ahead

Despite expectations of an economic improvement, New Zealand continues to face significant challenges.

Domestically, a BusinessNZ report notes that the country continues to grapple with productivity issues and a need for robust policy solutions on aging population funding, particularly regarding superannuation and health services.

However, it says it’s not all bad news. Commodity prices, particularly for dairy, have recently risen which is good news for regional economies and the dollar’s decline against major trading partners provides an additional boost to exporters.

BusinessNZ states that the global outlook is less optimistic than in recent decades, with ongoing geopolitical risks and wars leading to a more insular trading environment.

It notes that US President-elect Donald Trump’s proposed tariffs on China, Canada and Mexico could have far-reaching implications.

Kiwibank economists agree. On the one hand, they say financial markets are betting that tariffs will be inflationary, especially if imposed at levels around 20%, as has been floated. On the other hand, any tariffs may be deflationary.

“Tariffs raise the barrier for goods to enter a country. Under the Trump regime, piles of (Chinese) exports destined for the US may need to be diverted elsewhere. For example, we may see more Chinese electric vehicles rolling down Kiwi streets, at a discount,” Kiwibank’s economists observe.

They believe another challenge is weak economic growth in China, New Zealand’s largest trading partner. The impacts of fiscal measures taken in China are yet to be seen and the developing tariff situation could make matters worse for its economy, they say.

Financial facilities to help business growth

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