Short points, quick returns. A collection of themes and talking points.
Better times are ahead
The economy has turned the corner in a more substantive manner of late. Conviction is growing. There are better times ahead in 2026. The long-awaited for recovery is here.
Hours worked have turned positive after six quarters of successive decline. Building consents are starting to trend up. Tractor sales are up on 12 months ago. Retail foot traffic is rising as are average transaction values according to Bellwether. We saw a bumper third quarter lift in retail sales volumes. Tourism has recovered lost ground. Concrete production has turned positive though still well down on the prior year. It looks like a trade deal with India is pending. The government has done an excellent job on the international stage. Measures of domestic financial stress have eased as lower interest rates reduce debt servicing pressures.
Transaction balances for non-financial businesses are on the ascent. October was a big month for business lending. There’s been a small increase in the number of job ads in recent months. Rural regions are outperforming the major cities supported by commodity prices and the low NZ dollar. Dairy prices have eased back though a strong payout of $9.50/kgms is still expected this season.
The initial step in any recovery is recovering ground lost. We’re making our way through that process. This isn’t a V shaped recovery but a recovery none-the-less. Structural headwinds such as rising energy costs, a doubling in gas prices for commercial users, poor infrastructure and the need for fiscal consolidation are all handbrakes.
RBNZ hoping for an extended holiday
The impact of lower interest rates is continuing to filter through the economy. According to the RBNZ “the average yield on mortgages has fallen to 5.4 percent. With close to 40% of fixed rate mortgages due to reprice over the December and March quarters, the average mortgage yield is expected to fall further to 4.7 percent by September 2026.”
That means there’s still stimulus in the pipeline, the RBNZ believes inflation will return to 2% so the OCR is projected to be on hold from here. How long on hold is open to conjecture.
Financial markets have gone from pricing in a lower OCR to saying there’s the possibility it could move up in 2026. Headline inflation is 3% though projected to return to 2%, and the latest Monetary Policy Statement noted a “low tolerance for prolonging the return of inflation to the target mid-point.”
It looks like we’ve seen the lows now for interest rates. Bond and swap rates across the 1 to 5 year curve have lifted 10 to 30 basis points since the start of November.
The supply-side capacity of economy
The RBNZ is helping stimulated demand via lower interest rates, lower NZ dollar, higher commodity prices and some areas of government policy. After a siesta, private sector confidence is starting to manifest in activity too. Construction activity is still a way from joining because the fundamentals (population demand) still exceed supply (building consents).
For this upswing to be enduring, we need to see an improvement in the supply-side capacity of the economy. That’s the combination of productivity and factor inputs such as labour. If this is stronger, we can absorb stronger demand without generating inflation.
The RBNZ put potential growth (how fast we can grow in inflation adjusted terms or volume without generating inflation) at around 1.5%. However, this is expected to build towards 2.6% over the coming years as migration and productivity lift.
This rise helps absorb the increase in demand. Inflation remains low and the OCR goes back to 3%. The economy returns to balance with 2% inflation and the OCR around neutral (3%). It’ll be a different story if the projected growth doesn’t take place. Inflation will not be returning to 2% as projected.
Will a better economy rescue the government?
The traditional wisdom says yes. Voting is influenced by economic conditions. A struggling economy in 2024 and most of 2025 can easily be pointed as one factor behind the incumbent government losing momentum and disastrous results in the latest IPSOS Issues Monitor with the National party assessed as best able to handle only 2 of the top 20 issues. They were assessed as best able to handle 15 of the top 20 in prior to the 2023 election.
The International Monetary Fund’s Managing Director Kristalina Georgieva warned in 2024 that that the world is in danger of becoming mired in a low-growth, high-debt path leading to “dissatisfied populations”. Put simply, growth is not enough when you’re struggling with cost-of-living pressures.
The United States one of the world’s strongest economic performers, has a 4.4% unemployment rate, yet consumer confidence is at recessionary levels. Some in society are doing well but many aren’t.
We have the same issue here with business optimism but consumer pessimism. It’s inflation and the cost of living that’ll define the election, not just whether we get growth.
The bottom line
We’ve passed a key inflection point. From here, confidence could further manifest into more activity. Without a pickup in productivity though, the economic improvement could walk into a capacity wall. Inflation will be the winner and no one really wins from inflation.
Insurance movements in the past year
- Life insurance 0.6%
- Dwelling insurance 5.6%
- Contents insurance. 9.3%
- Health insurance 19.2%
- Vehicle insurance -0.8%
Administrative inflation
Headline inflation is 3%. Administrative inflation courtesy of local and central government charges is up 8.4%. The more money that gets siphoned up in local and central government charges, the less money available for spending in other parts of the economy. It’s a simple substitution effect.
A different recovery
The historical playbook for economic recoveries have centred around lower interest rates stimulating interest sensitive parts of the economy. The Auckland property market is normally one of those that leads the way. The recovery underway is rural rather than Auckland driven. It’s an earnings recovery as opposed to a spending-led recovery. Compared with the September 2024, in September 2025 goods exports rose by $928 million (19%) to $5.8 billion. Leading the way is dairy (milk powder, butter and cheese) up 27% and meats and edible offal up 24%. Commodity prices and the low NZD/USD have helped.
A rural injection
As part of the divestment of its brands, Fonterra has promised its farmer shareholders a capital return of NZ $2/share, adding up to approximately $3.2 billion. This is around 0.7% of GDP. Cue more of a rural led recovery.
Tractor sales
Tractor registrations were up 13% in September 2025 compared to September 2024. While tractor sales are coming off a low base, it’s another sign that we’re starting to see a different sort of recovery being led by the regions.
This from Port of Auckland CEO Roger Gray via Linkedin: “Yesterday we saw more evidence that the economy has turned… in the RORO terminal we had tractors, tractors, tractors everywhere... October has also been one of the busiest in the container terminal since 2015.”
Currency gyrations
One factor behind the rural economy has been the NZD/USD which sits in an export friendly zone. We’ve recently seen movement in another currency, namely the NZD/AUD which has fallen below 0.88 after spending a considerably amount of time above 0.90. This will assist exporters into Australia but dents purchasing power when holidaying across the ditch.
Tourism still recovering
Tourism is at 87% of pre-Covid levels. We’re around 400,000 tourists short which has taken out some spending power. Queenstown bucks the trend with international arrivals into the airport at 130% of pre-Covid levels.
Consumer confidence still weak
According to ANZ-Roy Morgan consumer confidence fell slightly from 94.6 to 92.4 in October which is a low level. The proportion of households thinking it’s a good time to buy a major household item (the best retail indicator) fell from -11 to -14. This indicator hasn’t been positive in more than four years.
The cheque is in the mail
The OCR might have fallen 250 basis points but mortgage holders so far have seen 94 basis points of benefit. The yield on loans has gone from 6.4% to 5.5%. A key reason for the delay is the impact of having a fixed mortgage. With around 70% of mortgages to refix in the coming year monetary policy is taking time to diffuse through the economy.
Bank non performing loans (NPLs)
NPLs are reported at 0.7% of total loans which is a healthy low number. It doesn’t show excessive stress. However there’s another interpretation. It’s a sign banks have been taking very little risk relative to the pricing (margin) being charged.
It’s easy to point the finger at government during tough times and we often do
Yet there are some major listed companies that have recently destroyed a lot of shareholder value over time. Perhaps it’s time we turned from the Mood of the Boardroom (which is a survey run by NZME) to the Performance of the Boardroom. Minus 0.3%. That’s the average decline in capital productivity per year since 1996. The overarching trend is we build stuff and mismanage it.
A capital gains tax
The Labour party has proposed a narrow capital gains tax (CGT) focused on residential and commercial property outside of the family home. The IMF and OECD have been recommending a CGT for years which most other countries have. Contrary to the views of the government, it won’t wreck the economy and life will go on. The narrow-based CGT proposed needs to be eyed with consideration as to what could’ve been put on the table in the form of a wealth tax or other taxes.
Sick of teacher striking?
Has teacher pay kept up with inflation? Back in mid-2015 a step 1 (referred to as T1 or G1E-G2E) trained secondary teacher’s base pay was $45,068. This had risen to $61,329 by December 2024, a rise of 31.3%. Another adjustment is around the corner. The top of the salary scale (step 10 or T10) in mid-2015 was $73,000. That is now $103,086, a rise of 41.2%. The ceiling has been raised, and faster than inflation. Inflation has risen 34.7% between mid 2015 and now, or 31.5% between mid 2015 and the end of 2024 (the last pay rise for teachers).
A big portfolio to manage
Will new councillors get it right and understand the portfolio management challenges they face? As at the end of June 2024 councils reported assets of $227 billion equivalent to 57% of new Zealand’s gross domestic product (GDP). Infrastructure assets were $150 billion (two-thirds), land and buildings $40 billion, investments $17.2 billion, cash and bank deposits $2.3 billion and other fixed assets of $7 billion. Those are sizable portfolios to manage.
Long-term fiscal challenges
In the 1960s there were around seven New Zealanders aged 15–64 for every person aged 65 or older. Today there are four. By 2065 the ratio is projected to fall to two. If NZS and Health take up an additional share of the economic pie, then something has to give. NZS is projected to go from 5.3 to 7.8% of GDP and health from 7.1 to 9.9% of GDP. This is combined resource reallocation of 5.4 percentage points of GDP. Healthcare costs rise with age. For someone in the twenties that (taxpayer) cost is $2,000-2,500. For someone in the forties, $3,000. For someone 65-69 the average cost is $5,300; 70-74 it is $6,300 and by age 75-80 it rises to $9,000. Then it starts getting exponential rising to $28,400 for someone aged 90+ with aged care 57% of that cost.
According to the Treasury, “There are choices to be made as to the future New Zealanders want. The choice facing New Zealanders is what legacy we want to leave to future generations.”
Interesting fact
The population aged 65 plus holds approximately 38% of household wealth or around $780 billion.
Disclaimer: While Bagrie Economics uses all reasonable endeavours in producing reports to ensure the information is as accurate as practicable, Bagrie Economics shall not be liable for any loss or damage sustained by any person relying on such work whatever the cause of such loss or damage. The content does not constitute advice.