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New Zealand in 2025

  • GDP growth is set to pick up in 2025, as lower interest rates support increased household and business activity
  • The jobs market is set to stabilise with a recovery likely to lag the cycle; softening wages growth should ensure subdued inflation
  • While fiscal consolidation is ongoing, policymakers ought to focus on improving weak productivity, which is the key longer-term issue

Can the ‘rock star’ status be restored?

Interest rate moves have driven a big economic cycle in New Zealand. In response to the post-pandemic high inflation challenge, the RBNZ hiked substantially, lifting its cash rate by 525bp to 5.50% from late 2021 to mid-2023. In 2024, the impacts of this tightening on activity were clear – New Zealand tipped into a recession and the unemployment rate rose sharply. Across the developed world, HSBC’s estimates suggest New Zealand’s economy had the largest contraction in GDP in 2024.

This recession also helped to lower inflation, which fell back into the RBNZ’s 1-3% target band for the first time in three years. In turn, it allowed the RBNZ to sharply pivot in August 2024, and it has delivered 125bp of cuts since then. We see a further 125bp of cuts by Q3 2025, taking the cash rate to 3.00%, and expect this to pump-prime a strong growth upswing. After a particularly tough year in 2024 – we estimate that GDP fell by 0.5% that year – we forecast GDP growth lifting to 1.8% in 2025.

There are already some early signs of growth picking up. Business and consumer surveys have both improved, while card spending figures have also risen. The housing market appears to be stabilising, as mortgage lending has increased. While weakness in the jobs market is likely to still weigh on activity in the near-term, we see the unemployment rate peaking and starting to fall later in 2025.

In short, New Zealand’s outlook in 2025 is a good deal more positive than in recent years. However, the longer-term outlook is more challenged by weak productivity. Although this is not a new challenge, productivity outcomes have been notably subdued post-pandemic. Policymakers ought to have a greater focus on ‘growing the economic pie’ and this requires a bold reform agenda and private sector support.

1.8%
New Zealand’s 2025 GDP growth forecast, HSBC
2.2%
New Zealand’s 2025 Inflation forecast, HSBC

We see that reforms could be spread across a number of areas. Reducing regulatory obstacles, improving competition, and attracting foreign investment, alongside targeted use of the public sector balance sheet, are among the ideas. A focus on improving New Zealand’s ‘growth engines’ would also help. We see agricultural and services exports as two key areas which can further support the economy.

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