New Zealand’s economy demonstrated resilience in the December quarter, with GDP rising by 0.7 percent, rebounding from previous declines and surpassing market expectations. On an annual basis, GDP contracted by 1.1 percent, representing an improvement from the 1.6 percent decline recorded in the September quarter. The recovery in international tourism supported growth in transport, retail, hospitality and recreation sectors. However, the construction sector continued to face pressure, with activity dropping an additional 3.1 percent.

A period of restrictive interest rates has reduced demand in the New Zealand economy and contributed to lower inflation. In response, the Reserve Bank of New Zealand (RBNZ) has implemented a series of rate cuts to stimulate economic activity, moving inflation closer to the target range. While core inflation trends toward the mid-point of the target, headline inflation is anticipated to rise in the coming quarters, though it will remain within the target range, driven by a weaker New Zealand dollar and higher oil prices.

Labour market conditions have softened, indicating reduced demand for workers and slowing wage growth. Employment levels and job vacancies have declined in line with subdued economic activity. Net migration has also significantly decreased from recent highs, with fewer migrant arrivals and more New Zealanders departing, partly due to more appealing labour market conditions in Australia.

Over 2025, economic growth is expected to see a modest improvement, supported by lower interest rates that will encourage consumer spending. Heightened risks surrounding the recent changes to US trading policies and their potential impacts for the global economy have moderated the growth outlook for the New Zealand economy in the near-term. While the latest developments are expected to be disinflationary for the economy, heightened uncertainty and weakness in business investment and consumer spending could have more severe impacts for growth in the outlook.

In response to these developments, we expect the RBNZ to lend greater support to the economy through further rate cuts in 2025.