ASB's Quarterly Economic Forecast: Road to recovery: New Zealand's economy finds its footing

Lower interest rates, strengthening primary exports and higher consumer spending are signalling a steady but gradual economic recovery over 2025, according to the latest ASB Quarterly Economic Forecast.

"If economic recoveries are cars, New Zealand is more Toyota Prius than Ferrari 458. After high interest rates hit hard, the country is starting to work its way out of what proved to be a sharp and deep recession in 2024. We saw economic growth resume at the tail end of 2024, aided by easing inflation pressures and export growth." says ASB Chief Economist Nick Tuffley.

"There are a mixed bag of influences at work as New Zealand shakes off its post-COVID slump. We can expect a more pronounced recovery in the latter half of 2025, as lower interest rates steadily boost domestic activity."

"Although interest rates remain higher than historic lows enjoyed by Kiwi in the past 10 years, interest rates will soon plateau at their new 'normal' level. The positive impacts on growth will be steady, rather than explosive – though they will significantly ease economic pressure and improve the spending and cashflows of home-borrowers over the year."

Tuffley says that Kiwi exports are providing an additional economic boost. "Dairy incomes have increased with revenue up around $5bn from the previous season, beef farmers are benefitting from a U.S. love of hamburgers, and tourism earnings continue to recover."

There are some key headwinds preventing a swift economic recovery; cooling net migration flows are cooling, construction lagging behind the property market uptick and weak productivity growth.

Donald Trump's trade policies and geopolitical tensions across the globe could be the ugly downside to New Zealand's capacity for growth. "Where New Zealand ends up depends a lot on the fortunes of China, the U.S., and the extent to which NZ’s US-bound exports get levied over time."

However, CBA research suggests that the potential medium-term impacts on NZ’s GDP would be negligible (0.1 percentage point off GDP) if the US imposed tariffs on selected goods, or reciprocal tariffs, or just targeted China.

On the interest rate outlook for the nation, Tuffley says, "The RBNZ has nearly finished its easing cycle: we expect 25bp OCR cuts in April and May, taking the OCR to 3.25%. There is an increasing volume of mortgages due to refix over the course of this year, as borrowers try to time the bottom of the market. The risk is that any sudden rush by borrowers to fix their interest rate puts some upward pressure on interest rates. Waiting to pick the bottom of the rate cycle has its costs (the interest rate people pay in the meantime) and risks (there is no guarantee the low will remain for long)."

On the outlook for the NZ dollar, Tuffley says, "The NZD has softened a touch against the USD and yen since Donald Trump was elected President. Generally, we expect the USD to strengthen slightly further as tariffs get implemented, pushing NZD/USD down to USD0.55."

"The country's economy appears to be on the mend, but domestic drivers point to a gradual pace, and global developments could dampen the recent good fortunes of New Zealand's export sectors."

The latest ASB Quarterly Economic Forecast, along with other recent ASB reports covering a range of commentary, can be accessed at the ASB Economic Insights page: https://www.asb.co.nz/documents/economic-insights.html.