State of the Nation, December 2025

After a long and challenging period of adjustment after the COVID-era inflationary boom, the New Zealand economy is finally showing clear signs of cyclical recovery. GDP growth was weaker than expected in the second quarter of the year, but much of this can be attributed to volatility and seasonality, with underlying momentum broadly sideways through the first half of the year. The Reserve Bank’s decisive pivot to monetary easing – culminating in an outsized 50bp cut in October and a likely final 25bp cut in November – has set the stage for recovery. Though it must be borne in mind that the starting point for many industries is a fairly large hole in activity compared to the COVID-era boom.

The RBNZ’s recent actions have brought the Official Cash Rate down to 2.25%, with resulting significant drops in retail lending rates changing the maths substantially for those considering borrowing for a house, a car, a commercial property or a tractor. While headline inflation rose back to the top of the 1% to 3% target band in the third quarter, the medium-term outlook is for inflation to stabilise around 2%. The Reserve Bank Monetary Policy Committee remains vigilant, particularly regarding inflation expectations, but the risk of a wage-price spiral has receded. Non-tradable inflation is expected to continue its downtrend, and the recent strength in administrative prices should gradually dissipate.

Interest rates matter, but it’s the labour market that holds the key for the outlook for the household sector. Conditions appear to have stabilised, with the unemployment rate expected to decline steadily through 2026 from what is expected to be its peak of 5.3% currently.

Job ads are now trending upwards, and modest but steady wage and employment growth, combined with a recovery in hours worked, should see household incomes begin to outpace inflation. However, cost-of-living pressures remain acute for many, and consumer confidence is still subdued. The Government’s gradual fiscal consolidation is expected to help contain inflation over the medium term, though its direct impact on momentum is limited. The narrowing of the current account deficit to 3.7% of GDP has also reduced New Zealand’s vulnerability to global capital flow disruptions, should any occur, and despite the increase in Government debt that occurred during the COVID era, New Zealand is still viewed favourably by global bond investors.

Turning to the housing market, the recent story is one of stability rather than resurgence. House prices have been flat overall in recent months, with the nationwide REINZ House Price Index up only 0.3% year-on-year. However, sales volumes have picked up, and are now above their historical average, suggesting the market is strengthening. The market power is still very much with buyers, but as excess inventory is worked through, we expect prices to start to move higher.

Regional disparities persist – a reflection of broader disparities in economic performance – with Southland and other rural areas solidly outperforming the main centres. Wellington’s housing market and local economy remain particularly subdued, with the political employment cycle overlaid on the broader economic cycle.

Looking ahead, lower interest rates and a recovering economy are expected to provide support to house prices nationally, with prices forecast to rise by around 5% in 2026, but there is little to suggest a rapid upswing is imminent.

Construction is showing tentative signs of life, with building consents trending upward, and anecdotes and quirkier indicators such as Google searches for “builders” suggesting interest in renovations has lifted sharply. However, the sector will likely need to wait for house prices to move higher in order to see a strong lift in activity.

The agriculture sector has enjoyed a rapid upswing in recent years, with strong global prices and production volumes in dairy, red meat, and horticulture supporting rural incomes. However, the primary industries proved too small as a share of GDP or employment to drive a broad-based recovery on their own. Dairy prices are now 18% off their peaks, but a weak NZD and for Fonterra farmers, a very large capital return resulting from the sale of the consumer brands business to Lactalis, have taken the edge off the downswing so far.

Global risks remain elevated, with trade policy, geopolitical uncertainty, fiscal sustainability and stretched metrics in some markets front of mind. The local economic fallout from US tariff policy has been less severe than feared, and the recent removal of US tariffs on beef and kiwifruit is very welcome.

However, the outlook for the New Zealand economy remains highly sensitive to global shocks. For exporters, the outlook for the Chinese economy is particularly pertinent – there it’s a case of “so far so good” but their economy continues to work through adjustments, e.g. to housing valuations and a gradual economic decoupling from the US.

Bringing it all together, with monetary conditions now stimulatory and inflation risks contained, the conditions are in place for a cyclical recovery in the New Zealand economy. However, the pace and breadth of that recovery will vary across sectors and households, and the road ahead may be bumpy. The economy has done the hard yards, and while the recovery is underway, patience will likely be required as households and businesses regain confidence and momentum builds.