Economic momentum remained weak in the third quarter of 2024, with GDP contracting by 1.0 percent in the September quarter, following a revised 1.1 percent decline in the June quarter. This represents the largest GDP contraction over two consecutive quarters since the 1991 recession, excluding the period of the COVID-19 lockdowns. The contraction was widespread across several sectors, including a 2.8 percent decline in the construction sector, which continues its downward trajectory. The residual effects of restrictive interest rates have dampened demand in the New Zealand economy, with both consumers and businesses pulling back on spending.

The decline in economic activity has cooled demand and increased capacity across the labour market, , helping to alleviate inflationary pressures. In Q3 2024, inflation returned to the RBNZ target range for the first time since March 2021, easing to 2.2 percent in September and remaining in this position in December. Domestic price and wage-setting behaviours are now aligned with an inflation rate close to the target midpoint. A decline in import prices has also contributed to lower headline inflation. Given this inflation trend, the RBNZ initiated its rate cut cycle in August 2024.

Household consumption growth remains subdued, impacted by restrictive interest rates, weaker asset prices and declining population growth. Government consumption is anticipated to decrease in the coming quarters. Business investment also continues to decline, driven by weak demand and restrictive interest rates. Residential investment has also fallen further, reflecting the combined effects of higher interest rates and declining house prices. Both residential and business investment are expected to begin recovering in early 2025, as interest rates decrease further and economic activity strengthens.

Labour market conditions have continued to soften. The unemployment rate increased to 4.8 percent in the September 2024 quarter, up from 4.6 percent in the June 2024 quarter and 3.9 from the September 2023 quarter. Based on RBNZ’s projection, weakness in the economy is projected to further affect the labour market, with unemployment expected to reach 5.2 percent in March 2025.

Migrant arrivals have decreased, while departures of native New Zealanders have risen, driven in part by weaker economic conditions and a challenging labour market. Slower population growth is weighing on consumption growth and housing demand while also contributing to slower labour supply growth, which in turn limits potential output

Economic growth is expected to recover in 2025, as lower interest rates encourage investment and spending. Employment growth is anticipated to remain weak until mid-2025, with financial stress persisting for some households. Inflationary pressures are expected to ease over the medium term due to spare capacity in the economy and the adaptation of wage- and price-setters to a low inflation environment. This will allow monetary policy to become less restrictive over time.