Economic Outline

Economic Indicators

Thanks to exemplary pandemic management, New Zealand rebounded quicker than many other advanced economies. This resilience bolstered economic activity, complemented by robust investment and consumption, facilitated by generous fiscal and monetary support. However, after considerable policy tightening, the economy decelerated in 2023 (+0.6%) and struggled in 2024, facing tight financial conditions. While inflation successfully returned to target and the current account deficit narrowed, real GDP is estimated to have contracted by 0.5% year-on-year, largely due to a significant decline in investment. Growth is expected to rebound to 1.4% year-on-year in 2025, accelerating further to 2.7% in 2026. The normalization of monetary policy is likely to support consumption and investment, with net exports also contributing to aggregate demand. Over the medium term, economic growth will be driven by migration, while productivity growth is forecast to remain modest unless significant structural reforms are implemented (IMF).

In the year ended June 2024, the general government net operating deficit narrowed to NZD 3.1 billion, compared to NZD 6.7 billion in the previous year. Total operating income rose by 9.7%, driven by higher tax revenue, while operating expenditure increased by 7.0%, following a 3.4% rise in 2023. The growth in expenditure was largely due to higher social benefits (up NZD 4.3 billion), employee expenses (up NZD 3.5 billion), interest expenses (up NZD 1.7 billion), and depreciation (up NZD 1.2 billion). The New Zealand government has forecast a budget deficit of NZD 17.31 billion (USD 10.02 billion) for the fiscal year ending June 30, 2025. It now no longer expects the government’s books to show a surplus during the five-year fiscal period ending June 2029. Government data shows that net core Crown debt reached NZD 175.5 billion (42.5% of GDP) as of 30 June 2024, marking an increase of approximately NZD 20 billion from the previous year. Despite high debt service costs and a slowing economy, non-performing loans have risen modestly compared to past recessions. Banks are well-capitalized with adequate buffers. Credit growth remains weak due to low demand. Housing sales are slowly increasing, with prices stabilizing 25% above pre-pandemic levels, while affordability improves as nominal incomes rise. Weaker global prices and tight monetary policy brought inflation to target after 13 consecutive quarters (2.2% as of December 2024), prompting the Reserve Bank of New Zealand (RBNZ) to reduce the Official Cash Rate (OCR) by 175 basis points to 3,7% over four cuts since August 2024. High-frequency data indicates a nascent economic recovery, with improved business and consumer confidence in Q4 of 2024.

Labour market conditions remain tight, characterized by record-high labour force participation and negligible slack, evidenced by historically low levels of unemployment and underemployment rates. This scenario has led to upward pressure on wages, especially within the services and construction sectors. While the recent surge in migration has alleviated some labour market strain, expectations for wage growth, particularly in the short term, remain elevated. Unemployment was estimated at 5.1% in 2024, from 3.7% one year earlier. It is forecast to remain stable this year and decrease to around 4.5% in 2026 (IMF). Some key social issues faced by the New Zealand government include dealing with an ageing population and increasing health care costs, boosting employment and household incomes, and increasing housing affordability.

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