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The New Zealand economy adjusted to much lower interest rates in 2025, but the recovery was slow to gain traction. Businesses felt more optimistic about general economic conditions as interest rates continued to fall, but real activity remained weak — a theme shown in NZIER Quarterly Survey of Business Opinion over the past year.
Caution continued to reign among firms and households when it came to spending and investment. This caution will likely become more apparent as New Zealand heads into a general election scheduled for 7 November 2026, as firms and households tend to delay big-ticket spending in the face of uncertainty.
Looking forward, government spending, productivity and fiscal sustainability are shaping up to be the hot topics this election year. But slowing population growth is also likely to continue weighing on the pick-up in economic activity, as many New Zealanders move across the Tasman in search of better job prospects in Australia.
Inflation remained elevated over 2025, with headline consumer price index inflation ending the year above the Reserve Bank of New Zealand’s 1–3 per cent target band. Higher household living costs, including property rates and food prtices, were key contributors to inflation over the year.
Yet core inflation and inflation expectations measures suggest inflation is broadly contained in the New Zealand economy. Anchored inflation expectations allowed the Reserve Bank to cut interest rates to support an economic recovery even as headline inflation remained elevated.
GDP data for the September quarter of 2025 suggested the New Zealand economy was finally starting to respond to the stimulus of lower interest rates. Stats NZ estimated that economic activity increased 1.1 per cent over the September quarter, reversing the 1 per cent contraction in the previous quarter. The increase in activity was broad-based across sectors, suggesting the recovery was starting to gain traction. Higher global commodity prices, particularly for dairy, also bode well for farmgate returns even as growth in key trading partners slowed.
The subdued recovery in New Zealand’s housing market has affected demand in other parts of the economy during 2025. Low housing turnover weighed on retail spending on furniture and electronics, given households tend to purchase these when moving to a new home. Modest house price growth also discouraged property developers from undertaking new developments, given uncertainty about achievable sales prices once construction is completed.
In its November 2025 Monetary Policy Statement, the Reserve Bank of New Zealand indicated that the 25 basis point cut to the Official Cash Rate (OCR), which brought the rate to 2.25 per cent, was likely to be the last in this cycle. Considering the rapid pace of easing since August 2024, that level of the OCR should be sufficient to support a sustained recovery in activity over 2026, without risking persistently high inflation.
The concentration of mortgage borrowing at the one- to two-year part of the mortgage curve means it typically takes around 18 months for the full impact of OCR changes to flow through the broader New Zealand economy. This lag in the transmission of monetary policy suggests that lower interest rates will continue to support a recovery in activity over 2026.
The Half Year Economic and Fiscal Update, released in mid-December 2025, shows the ongoing fiscal challenges facing the New Zealand government. The revised forecasts point to a slight downgrade in the fiscal outlook compared to Budget 2025, with the return to an underlying operating surplus now expected one year later, in 2029–30.
The weaker outlook largely reflects expectations of lower tax revenues over the coming years. With the economic recovery in 2025 proving more fragile than anticipated, growth is now expected to be slower than forecast in Budget 2025, implying a smaller income tax base.
Despite the fiscal downgrade, the government’s Budget Policy Statement reaffirmed its goal to return a core measure of its operating balance to surplus by 2028–29 through fiscal consolidation, spending restraint and reprioritisation. With the long-term fiscal challenges from New Zealand’s ageing population and climate change emerging, the government recognises that it is crucial to bring its books back to surplus over the coming years.
Globally, geopolitical tensions continue to simmer in the background, with ongoing conflicts in Europe and the Middle East. While New Zealand benefited from strong commodity prices and services export demand, risks remain from shifts in global financial conditions and disruptions to supply chains.
Christina Leung is Deputy Chief Executive and Principal Economist at the New Zealand Institute of Economic Research.
Ting Huang is Senior Economist at the New Zealand Institute of Economic Research.
This article is part of an EAF special feature series on 2025 in review and the year ahead.