New Zealand’s Economy Expected to Recover
New Zealand’s economy is expected to see a growth upswing in the coming months, despite a recent decline in GDP. According to HSBC economists, the combination of lower interest rates and high commodity prices will support this growth. In their recent Economic Comment, HSBC’s Australia and New Zealand chief economist Paul Bloxham and economist Jamie Culling downgraded their 2025 GDP forecast to 0.4% due to the shock 0.9% decline in June quarter GDP. However, they expect GDP to recover in the second half of 2025 and 2026.
Factors Supporting Growth
Two key factors are likely to underpin the upswing in New Zealand’s economy. Firstly, strong commodity prices have seen the terms of trade around a record high, supporting national incomes. Secondly, lower interest rates are expected to support the consumer and business investment. The Reserve Bank of New Zealand (RBNZ) has already delivered 250 basis points of easing in its cash rate, and HSBC economists expect another 75 basis points of easing, taking the RBNZ’s cash rate to 2.25%.
Recent Decline in GDP
The second quarter fall in GDP was attributed to various factors, including global trade developments and heightened uncertainty, which may have contributed to firms delaying investment decisions. Temporary local factors, such as energy restrictions on the Tiwai Point aluminium smelter and volatility in the timing of food manufacturing, also weighed on output in the quarter. Additionally, net migration has slowed sharply, with more Kiwis departing to Australia.
Monetary Policy and the Economy
Monetary policy seems to be transmitting slower than typically previously assumed. Credit growth has accelerated, but lower interest rates are yet to support growth or the housing market more broadly. A delayed rollover of households onto lower fixed mortgage rates, a still-soggy jobs market, and lingering cost and price pressures may be factors contributing to this.
Statistical Issues and the Road to Recovery
Some of the weakness in the Q2 GDP figures can be put down to statistical issues. Statistics New Zealand has had difficulty measuring the economy in recent times, with large revisions made to GDP in December 2024. The top-down GDP estimate does not match the bottom-up sum, and the gap – a ‘balancing item’ – has been notably volatile and seasonal. This made a very large negative contribution to Q2 GDP, of around -0.6 percentage points.
Future Outlook
The RBNZ had already flagged 50 basis points of easing in its own OCR projection. HSBC economists believe that the sharp downside surprise on Q2 GDP means more spare capacity in the economy than the central bank had expected, and will be enough to get the committee to deliver an outsized 50 basis points October cut. The November RBNZ OCR meeting outcome will hinge more on the forthcoming Q3 jobs and inflation data.
The Role of Fiscal Policy
The Government also has a part to play with its fiscal policy. Fiscal policymakers have been looking to consolidate after the large pandemic-era spending, which makes some sense. However, the primary goal ought to be aiming for New Zealand to be ‘open for business’ and to be attractive for local and global investment. If fiscal policymakers can help create an environment where the private sector can thrive, this would help to underpin a strong growth pathway.
Conclusion
In conclusion, New Zealand’s economy is expected to see a growth upswing in the coming months, supported by lower interest rates and high commodity prices. While the recent decline in GDP was a setback, it is likely that the economy will recover in the second half of 2025 and 2026. The RBNZ and the Government both have a role to play in supporting this growth, with the RBNZ expected to deliver further easing and the Government needing to create an environment that is attractive for local and global investment.
