New Zealand’s economy saw a modest improvement over Q1, supported by a high level of overseas arrivals driving demand. The economy expanded by 0.2 percent in the March quarter, recovering from a 0.1 percent contraction in the previous period and exceeding market expectations of stagnation. On an annual basis, gross domestic product (GDP) grew by 0.3 percent, an improvement from the 0.2 percent decline over the year to December 2023.

While the economy outperformed expectations in Q1, it remains in challenging territory. However, inflation shows signs of improvement. Annual inflation softened more than expected in the June quarter, dropping from 4.0 percent to 3.3 percent, marking a three-year low and falling below the 3.6 percent increase anticipated by the RBNZ. Stable inflation expectations against the weak economic outlook have prompted the RBNZ to drop the cash rate by 25 basis points in August for the first time since March 2020.

Over the June quarter, inflation slowed from 0.6 percent to 0.4 percent. If this trend continues in Q3, annual inflation will be within the RBNZ target range of 1.0-3.0 percent, prompting further rate cuts.

While overseas arrivals in New Zealand remain high, a strong increase in the number of departures is impacting net migration. A challenging economy, a change in government, and the attraction of abundant and well-paid opportunities in Australia has led to this rise in departures. If this trend continues, it could weaken New Zealand’s economy by further reducing net migration numbers.