Economy slows amid ongoing challenges

New Zealand’s economy contracted by 0.9 percent in Q2 2025, a sharper decline than the Reserve Bank of New Zealand’s (RBNZ) forecast of 0.3 percent. This marks the third contraction in five quarters, highlighting the persistent economic challenges facing the country.

Activity across key sectors remained subdued, with construction slowing due to reduced investment, manufacturing impacted by weaker export demand and the service sector showing limited recovery amid soft tourism. Rising prices for essentials, employment shifts and falling property values constrained household and business spending.

External pressures further weighed on the economy during the quarter. In April, the US imposed 15 percent import tariffs on products from several countries, including New Zealand, and higher than the 10 percent rate applied to Australian goods. This disparity risks New Zealand’s export competitiveness and output performance in the outlook. Broader global trade tensions and weaker demand from key trading partners have also impacted the export-reliant economy.

Inflation remains near the upper end of the Monetary Policy Committee’s 1.0–3.0 percent target range but easing domestic pressures and spare capacity are expected to bring headline inflation back to the 2.0 percent midpoint by mid-2026. Labour market conditions softened slightly, with the unemployment rate rising from 5.1 to 5.2 percent, indicating additional slack in the labour market.

In a surprise move, the RBNZ cut the Official Cash Rate by 50 basis points to 2.5 percent in October 2025, which is double the reduction anticipated by most economists. The central bank cited weaker than expected economic activity through mid-2025 and subdued household consumption as key drivers of the decision. This marks a cumulative 300 basis point reduction since August 2024, making the RBNZ one of the most aggressive easing central banks globally.

The RBNZ signalled openness to further rate cuts if inflation pressures continue to ease and growth remains weak. The move triggered a sharp market reaction, with the New Zealand dollar falling nearly 1.0 percent to a six-month low and government bond yields dropping, reflecting expectations of prolonged monetary stimulus.

Looking ahead, the outlook presents a mix of risks and opportunities. While cautious consumer and business sentiment may limit near-term growth, the larger than expected rate cut is expected to provide stronger support for demand and investment. Market pricing now suggests a strong possibility of another 25-basis point cut in November, as policymakers aim to revive momentum and steer inflation sustainably toward the 2.0 percent target.