We await the economy to really kick into gear.
A necessary condition has been a relaxation of monetary conditions in the form of lower interest rates, aided by the NZD/USD settling around 0.60.
Interest rates have shown time and time again to elicit a powerful impact on interest-sensitive sectors of the economy such as durables, housing and construction. Farmers and regional New Zealand are doing the lifting for now.
After recovering in late 2024 and early 2025, growth looks to have stalled around mid-year and in the words of Sir David Lange, “stopped for a cup of tea.”
Timely higher frequency indicators such as traffic volumes have softened and the Reserve Bank’s “nowcast” for June quarter gross domestic product (GDP) has turned negative. It’s an argument for even lower interest rates. Insolvencies are rising, though that’s normal as it’s a lagging indicator. The stalling does not look too worrying for now. Every cycle is different.
Normally at this juncture the housing market drives the next leg of the upswing, flowing into construction. The economy will not really fire up until construction activity strengthens – it’s a sector that rides high in good times and suffers in bad times. Interest rates are also a big influence and lower rates are helping, unfortunately, other fundamentals for an upswing are not yet in place.
Population growth, which drives demand is also soft. The combination of natural population growth (around 20,000) and migration (around 15,000) gives total population growth of around 35,000. Divide by 2.5 people per house and base “demand” sits around 14,000. Add a few thousand for depreciation on New Zealand’s old housing stock or a natural disaster and you take it to 15,000-20,000.
New Zealand has consented 34,000 units in the past year, well down from the 50,000 peak. At face value 34,000 is still respectable but not relative to demand. There’s ample stock and yet the construction sector is still saying times are awful. Enquiry levels seem to be lifting though.
The ratio of house prices to income in New Zealand is still high at around 6. The current account deficit remains large at 5.7% of GDP. These are like injuries the economy carries and take time to heal. Non-residential construction activity has also started to slow.
Prospects for business investment look better, helped by the Government’s Investment Boost. There’s some nervousness though over where the 2026 election could take us.
Households continue to benefit from falling interest rates, however the employment market remains quiet, there are a lot of construction jobs being lost and headline inflation is rising, eating into real disposable income.
So, we do not have the conditions in place for a pro-cyclical upswing, where growth upturns have tended to be rapid. Conditions are in place for a gentle upswing, which is arguably of better quality, supported by exports rather than the economy simply borrowing and spending.
An area to watch over the coming months will be government related activity. “Cancel-nomics” has been apparent post the election, but many projects are now starting to get the green-light, in part I suspect to show some project delivery heading into the 2026 election.
The real story about this recovery centres around healing and time. A lot of structural damage has been inflicted over many decades by successive governments. Education, infrastructure and energy come to mind. The finger can be pointed at many private sector enterprises too who have destroyed shareholder wealth. You cannot magically take productivity growth from 0.3% per year (the decade average) to back above 1% per year where it used to be.
Sugar candy economics (lower interest rates) has limited bearing on productivity. Structural change, and the time to allow these changes to be imbedded are critical. I can’t wait to see major changes in the National Certificate of Education Attainment (NCEA).
An awkwardness towards the economy is appearing in political polling with the incumbent government not hitting the mark, especially with inflation rising and (according to the IPSOS Issues Monitor) the cost of living remaining household’s biggest concern, followed by healthcare. Households are waiting for their local authority rates notification, double digit rises in electricity bills hurt and so too does the price of butter, though it’s still a lot cheaper than a pint of beer.
Within this awkwardness there are potential game-changers. How quickly can New Zealand unlock its natural resource base to generate wealth? Can we secure a free trade agreement with India before year-end?
We know there are a lot of opportunities out there as well as challenges. Good things just take time. Society (voters) doesn’t tend to be very patient though.