Economy on the mend but risks impact the outlook
Economic growth resumed in 2025 after the country experienced a worrying recession. Activity contracted by 0.5% in 2024 due to tight financial conditions affecting investment and (highly indebted) households, while trade performance was poor as a result of weak growth in China, the country's main export destination. In addition, the winter energy crisis prompted many businesses to cease operations due to soaring electricity prices. Meanwhile, productivity has fallen further, increasing unit labour costs and putting additional pressure on company margins.
The economy picked up in 2025, driven by continued recovery in tourism (around 6% of GDP) and the monetary easing initiated by the Reserve Bank of New Zealand (RBNZ) in August 2024, which supports investment and household consumption. In the first quarter of 2025, foreign arrivals reached 94% of pre-Covid levels (2019) in the same period, and policies such as relaxed visa requirements should further support tourism. Meanwhile, after increasing the official cash rate (OCR) to 5.5% in 2023, the highest level since 2008, the RBNZ has cut it six times since August 2024 for a total of 225 basis points (at June 2025). Lower inflation and the rising unemployment rate have prompted monetary easing, in light of the RBNZ's dual mandate of stabilising inflation around 2% and supporting maximum sustainable employment. Despite an acceleration in inflation to 2.5% in Q1 25, the latter remains within the RBNZ's target range (1-3%), and the struggle to recover from the recession suggests the prospect of further cuts. In this context, the plunge in residential construction seen in 2024 could come to an end from 2026 as the sector showed signs of stabilising in early 2025. There are fewer labour shortages (thanks in part to an increase in net migration), and cost pressures (material, borrowing costs) have eased. The upward trend in economic activity should continue into 2026, although risks clouding the outlook.
Trade restrictions add uncertainty to the island's economic recovery. Given New Zealand's relatively small contribution to the US trade deficit, the country has only received a preferential tariff of 10%. But as the tariffs are likely to be passed on to US consumers, they could inflate prices on US markets, thereby impacting demand for Kiwi products. Certain sectors are particularly at risk given their exposure to the US market, notably dairy products, meat and wine. In addition, New Zealand’s economy could be affected by indirect impacts, notably due to a drop in global growth, and particularly that of China, its main export market after the US.
Persistent fiscal deficit
While fiscal revenues are expected to increase for the 2025 budget ending in June 2026, the increase in expenditure is expected to be greater. Consequently, the deficit in the operating balance excluding gains and losses (OBEGAL or budget balance) is expected to widen slightly, with the government forecasting a return to a balanced budget in 2028. To boost company investment and tackle declining productivity, the government intends to implement a 20% tax deduction on new productive assets (machinery, tools and equipment). This will reduce potential tax revenues, but apart from that, the fiscal framework remains stable. Consequently, the expected economic recovery should increase the tax base and thus contribute to higher tax revenues. In addition, health, infrastructure, education, defence, and law and order are among the sectors that will receive a significant share of new spending. Another key budget measure is to implement changes to the KiwiSaver system, which is designed to encourage investment by Kiwis in the face of a rising cost of living. The changes include an increase in the default rate of employee and employer contributions, which will more than offset the decline in government’s contribution. These changes should support the local economy, as KiwiSaver funds are invested in New Zealand assets.
New Zealand's current account deficit has tended to narrow in recent years, after peaking in 2022 due to a drastic increase in global commodities prices. The lower current account deficit trend is set to continue in 2025. The goods trade deficit should continue to decline due to the expected global drop in commodities costs, implying downward pressures on import prices. In addition, US trade barriers are likely to trigger a global decrease in goods prices in search of alternative markets. However, this is partially offset by exports affected by sluggish global demand amid heightened trade tensions and by the RBNZ’s monetary easing policy which has created currency depreciation pressures, and consequently, upward pressure on import prices. Meanwhile, the services deficit should continue to narrow and could even turn into a surplus thanks to the recovery in inbound tourism. The current account deficit is traditionally financed by financial and capital inflows, both in the form of direct and portfolio investments. Foreign reserves which represented around four months of imports in 2024 may also contribute to the financing. Risks relating to a possible depletion of international reserves are limited as the country’s external debt (86% of GDP, and the sovereign part accounting for 45% of GDP) is mainly denominated in local currency.
Politics veer to the right
The October 2023 elections resulted in a relative victory for the National Party, led by Christopher Luxon, which won 38.1% of the vote. Garnering only 48 seats out of a total of 123, the National Party was unable to govern alone and formed a coalition with the ACT Party (11 seats) and New Zealand First (8 seats). The right-wing takeover represents a major turning point in the country's politics, ending the left-wing Labor Party's six-year tenure. The ruling coalition is attempting to reverse many of Labor's policies, including Maori privileges and rights, progressive social reforms and environmental regulations.
On the diplomatic scene, US-China rivalry poses challenges to New Zealand. Washington is a long-standing diplomatic and security alliance partner. Meanwhile, Beijing is by far the largest destination of New Zealand’s exports. In a bid to maintain a good relationship with both countries, former PM Hipkins visited China in June 2023. Nevertheless, under the new coalition, geopolitical alignment has shifted toward closer ties with Western allies (the Five Eyes alliance and AUKUS). Moreover, the appointment as Foreign Minister of Winston Peters, leader of New Zealand First and a critic of Beijing, may cool the relationship between the two countries.