Economic recovery gains momentum

New Zealand’s economy expanded by 0.8 percent in the March 2025 quarter, outperforming market expectations and marking the second consecutive quarter of growth. Although annual GDP contracted by 0.7 percent, the quarterly trend indicates a slow recovery is in progress.

The Reserve Bank of New Zealand (RBNZ) has signalled a slightly deeper policy easing cycle than projected three months ago, citing increased economic risks from global headwinds. In May, the RBNZ delivered its sixth consecutive cut to the Official Cash Rate (OCR), bringing it down to 3.25 percent. With inflation now sustained within the RBNZ target range, policymakers have greater flexibility to respond to domestic and international developments that could impact the economy.

While the economic recovery continues to make steady progress, it remains exposed to external risks. Geopolitical instability in the Middle East could fuel global inflation, with flow-on effects for domestic pricing. At the same time, the New Zealand dollar has weakened in response to the strengthening US dollar, following the Federal Reserve’s decision to hold rates steady and signal a slower pace of easing.

Domestically, the labour market has softened but is expected to strengthen as demand increases and economic momentum grows. Escalating trade tensions, including rising tariffs and shifting global supply chains, may delay the labour market recovery in the short term. These dynamics could constrain export volumes and weigh on business investment, particularly in trade-exposed industries.

Inflationary pressures may re-emerge in 2025 due to higher import costs and currency weakness, but the negative output gap is expected to keep headline inflation within the RBNZ’s 1.0 to 3.0 percent target range.

Overall, while the economy is showing signs of resilience, the outlook remains highly sensitive to global developments, particularly in trade and geopolitics. Policy flexibility and the strength of the export sector will be critical to sustaining recovery.