New Zealand’s economy is set for a slow but steady recovery in 2025 after enduring one of its toughest economic periods in decades. Although signs of improvement are emerging, economists warn that the recovery will be uneven, with some sectors bouncing back faster than others. Falling interest rates, improving consumer confidence, and a stabilising housing market are expected to drive growth, but challenges such as a soft labour market and global uncertainties remain.
A Gradual Recovery, Not a Sharp Rebound
After a prolonged downturn, forecasts suggest New Zealand’s economy will grow by 1.8% to 2.2% in 2025, following stagnation or contraction in 2024. However, experts caution that the recovery will take time.
Kiwibank economists describe 2025 as a “year of two halves,” with weak growth persisting in the first six months before gaining momentum later in the year. “It’s all about confidence,” Kiwibank chief economist Jarrod Kerr said. “And we expect the lift in confidence to persist, and eventually feed into activity, profitability, hiring and investment.”
Westpac chief economist Kelly Eckhold echoed this sentiment, predicting that regional economies, particularly those reliant on agriculture, will feel the benefits first. Strong dairy prices and easing cost pressures on farmers are expected to inject billions into the economy, giving rural areas an advantage over urban centres.
Interest Rates and Inflation: The Turning Point
The Reserve Bank of New Zealand (RBNZ) has already begun cutting interest rates, with further reductions expected throughout 2025. The official cash rate (OCR) is forecast to fall to around 3% to 3.5%, down from its 2024 highs. Lower interest rates should ease financial pressures on households and businesses, stimulating investment and spending.
Inflation, which peaked at 7.3% in previous years, has now cooled to around 2.2%, placing it within the RBNZ’s target range. Economists predict inflation will continue trending downward, providing some relief to consumers after years of high living costs. However, mortgage rate reductions will take time to filter through the economy. BNZ chief economist Mike Jones noted that while rate cuts are in place, the real impact on household budgets won’t be fully felt until mid-2025, as mortgage holders gradually refix at lower rates.
Labour Market Struggles to Catch Up
Despite improving economic conditions, the labour market is expected to remain under pressure. The unemployment rate, currently at 4.8%, is forecast to rise to a peak of 5.3% to 5.5% by mid-2025 before gradually improving.
Employment recovery typically lags behind broader economic improvements. Businesses are cautious about hiring, and many will wait to see sustained revenue growth before expanding their workforce. Public sector job cuts have also contributed to growing concerns about job security, particularly in Wellington.
Risks to the Outlook
While the outlook is improving, several risks could derail the recovery. Productivity remains a long-term challenge for New Zealand, with weak competition in key industries such as banking, energy, and retail continuing to limit economic efficiency.
External risks also loom large. Trade conditions, geopolitical instability, and global economic trends—particularly in China, New Zealand’s largest trading partner—could significantly impact exports and investment. Meanwhile, financial pressures on households remain a concern. Although lower interest rates provide some relief, high living costs and cautious consumer spending could temper the pace of recovery.
Policy Shifts and Economic Stimulus
The government is doubling down on policies aimed at boosting growth. Prime Minister Christopher Luxon has emphasised the need to “turbocharge” the economy through infrastructure investment, foreign direct investment incentives, and reforms to science and innovation. The newly established “Invest New Zealand” initiative is expected to streamline investment processes and attract capital into key sectors such as banking, transport, and technology.
The government is also pushing for regulatory reforms to improve productivity and remove barriers to economic expansion. “Too often when it comes to economic growth, New Zealand has slipped into a culture of saying no,” Luxon said in his recent State of Nation speech. “We need to shift our mindset and embrace it.”
Cautious Optimism for 2025
Overall, economists remain cautiously optimistic about New Zealand’s economic prospects for 2025. Growth is expected to return, albeit gradually, and the second half of the year should bring more stability. A stabilising housing market, lower interest rates, and improved business confidence all point toward a more positive outlook, but the road to full recovery will be bumpy.