Our economy came down with a very nasty dose of 'seasonal flu' in the middle of 2024.
It is, however, now undoubtedly making its way back to better health with the help of some 'medicinal' lower interest rates.
We get the latest health check on NZ Inc in the coming week with the release of GDP figures for the March quarter on Thursday, June 19. And the latest update should show the recovery that began towards the end of last year has continued and perhaps broadened.
As we would well recall, our economy fell into a substantial hole in the middle of last year, with back-to-back GDP falls of 1.1% for both the June 2024 and September 2024 quarters.
In very simplistic terms this was the economy crying 'enough' after the Reserve Bank had ramped the Official Cash Rate up all the way from 0.25% in late 2021 to 5.5% by May 2023 and kept the rate at that level in order to squeeze the life out of inflation, which had peaked at 7.3% in mid-2022.
Well, this not only squeezed the life out of inflation, but out of the economy too. However, with inflation last year 'cornered' once again in the targeted 1% to 3% range, the RBNZ began dropping the OCR in August 2024, and it is now down to 3.25%.
Till pretty recently many of the major bank economists would have been expecting to see another OCR cut at the next review on July 9. However, more recent economic data has tended to be exceeding economists' expectations. And indeed this week some of the main bank economists significantly upgraded their forecasts for the March quarter GDP outcome after stronger-than-they-expected results from so-called 'key partial indicators', particularly manufacturing and wholesale trading figures.
This has been the not-so-pretty picture of our GDP performance in the past year:
Undoubtedly that December quarter 0.7% rise in GDP was something of a relief. And there's a fair chance the March quarter figure could be a 0.7% rise as well, or close to it.
The RBNZ has forecast just a 0.4% rise. However, this forecast, contained in the RBNZ's latest Monetary Policy Statement (MPS) issued on May 28 was made without the benefit of seeing the most recent GDP-related 'partial' economic data.
If GDP has indeed risen by 0.7% in the March quarter - and therefore comfortably exceeded the RBNZ's forecast - then there's an increased chance the RBNZ will push the 'pause' button at the July 9 OCR review.
What a good result could mean
Westpac senior economist Michael Gordon summed all this up thus: "Our 0.7% growth forecast is an upgrade from our previous estimate of 0.4%, following the final batch of sectoral data that was released on Monday. Other market forecasters have shifted their views in the same direction, and the RBNZ (which forecast a 0.4% rise in its May Monetary Policy Statement) would likely be thinking the same at this point. Combined with the RBNZ’s declaration of “no bias” going into the 9 July policy review (and no quarterly CPI until after that date), a better-than-expected GDP result would make a strong case for leaving the OCR unchanged on that occasion."
So, what of this 'partial' data that's been released? What has it been telling us to give clues as to the likely outcome for GDP?
The volume of total manufacturing sales rose 2.4% in March, following a 1.2% rise in the December 2024 quarter. Wholesale trade sales rose a seasonally adjusted 3.2% after a 1.7% rise in the December quarter.
The seasonally adjusted volume of building work done in the March quarter was flat, which doesn't sound great. It does, however break a sequence of six consecutive quarters of falls.
Retailers have been struggling as we know, but retail trade volumes rose 0.8% in the March quarter after rising 1.0% in the December quarter.
And, as we also know, our primary industry exports have been going fabulously, particularly in dairy, meat, fruit and wood products.
'Two-speed economy'
ASB economist Wesley Tanuvasa and senior economist Mark Smith, who also pick a 0.7% March quarter rise for GDP, say there seems to be "a two-speed economy at play".
"Overall, the starting point for 2025 GDP is expected to be higher than the RBNZ’s May MPS assumption. We think downside growth risks still have credence because what’s driving growth is vulnerable to a tariff hit. Around 37% of total exports (goods and services) are to the US and China. The NZ economic outlook is dependent on whether exporters can diversify that concentration of demand over 2025. We are less convinced the external sector can maintain such momentum in a trade war. However, a higher starting point for GDP and the modest repair of interest-rate sensitive sectors like construction, suggest a turning point," they say.
"That’s a good news story in a sea of bad news stories. On balance, a more resilient economy supports our view that the RBNZ will pause in July. However, evidence of a kiwi-driven rebound is key to buttress the economic recovery ahead – if household spending isn’t sufficiently kickstarted by mortgages refixing to lower rates over the year, the RBNZ may have to relitigate its ‘neutral’ bias regarding easing."
I think we are at a very interesting stage. As I've noted before, the key thing this year was always going to be how quickly the economy would start to perk up once interest rate reductions began to properly kick in - and therefore how low the RBNZ would have to go.
A little earlier this year there seemed a fairly substantial body of thought that the RBNZ may have to take the OCR down to about 2.5% later this year - but in fact much of the economic data has come out stronger than, certainly the main bank economists, had expected. Will that continue though?
More money in pockets
As the ASB economists note above there does appear to be a two speed economy. Perhaps that's only to be expected. Any recovery was always likely to start in specific areas of the economy and broaden. Some of the strong primary industry returns - particularly in things such as dairy - are seeing debts being reduced and more money being put in pockets. In time that should boost spending.
So, a 0.7% growth figure for GDP in the forthcoming week would be very welcome if that's what the outcome is. But more important than the number will be the underlying detail of just how well or otherwise various parts of the economy are doing. We do want to see evidence that any recovery is becoming more broad based. And so does the RBNZ.
If the RBNZ becomes more confident that the economy is getting better, it's possible we might not see the OCR go much lower than 3.25%. And therefore the banks will be more constrained in offering future mortgage rate reductions.
If the details of the GDP release in the coming week suggest any recovery is 'brittle' then further OCR reductions may well be seen as warranted.
But assuming the number that comes out on Thursday, June 19 is a reasonably good one, it certainly is looking very likely there will be at least a 'pause' in any OCR cuts at the next review on July 9. Whether that 'pause' ends up becoming a 'halt' to the easing cycle we will have to wait and see. Plenty to watch out for.
*This article was first published in our email for paying subscribers early on Friday morning. See here for more details and how to subscribe.
32 Comments
Latest in a long line of 'the recovery is running a bit late, but it's definitely coming' articles. It reminds me of the Wellington bus service failures in 2023 - waiting for a bus that was sat motionless and driverless in the depot. It took actual action to get the buses running again - some wages got sorted out, some drivers got hired (and the borders were opened).
Now, we might get a warmer QoQ GDP figure this week, but what will it actually tell us? That export prices are up (thanks world food prices) and imports are down (thanks recession). That combo, by accounting certainty, will increase GDP relative to the previous quarter. Similarly, more tourists in Q1 2025 provided a bit of a boost to spending, but does it look like we are so back? Real card spending per capita has fallen back to 2013 levels!
A lot of the hopium is due to falling mortgage rates. But, how much have interest payments actually fallen? Well, we're back at April 2024 levels now - that's a bit over $1.8bn per month, or, to put it another way, $4,000 per capita per year. The economy started to contract when mortgage interest payments approached $1.5bn per month in April 2023 (inflation adjusted). It would take an OCR of around 2% and another 12 months to get us back down to that level. Not least because the average mortgage amount that first home buyers and investors are taking on is still rising strongly.
Meanwhile, jobs are still tracking 1.5% down on last year despite a big boost in working-age population, and benefit numbers just broke out strongly above Treasury's forecasts from Budget 2025 (two months ago!) These are lagging indicators obviously, but there is very little to suggest a turnaround at any time in 2025. And, if oil prices stay high, we are absolutely screwed.
It blows my mind that more people don't ask the simple question: 'What is the medium-term plan here?' Cross our fingers that import prices get cheap again and the Chinese and Americans stay sweet on our dairy and meat exports? Pray for another round of house price growth and feed off the resultant credit-fueled consumption?
Card sales levels at 2013 levels. Passenger vehicle sales at about 2015 levels. How much has our population grown over the last 10 years?
The economic plan has been clearly spelled out since the 2023 election campaign. Reduce the size of government in the NZ economy to support lower taxes and 'liberate' the private sector by getting rid of government services.
In theory - from a center right perspective - the reduction in government spending will make debt cheaper and easier for the private sector to get hold of and put to work. The private sector will step in where the government withdraws and deliver investment and jobs when the government halts investment and removes jobs.
Is it working so far? No, not really - any Keynesian will tell you government spending is critical to economic growth.
Well, yes, the plan was to shrink the govt and public spending, and bank on credit / investment growth driven by a negligible (zero?) reduction in the cost of borrowing. But that plan was never credible in any way, so was it ever a plan? Can you call a pile of wood and bricks a house?
Govt investment in things that boost efficiency and productive capacity and reduce the cost of living is of course the answer. The challenge is ensuring that the resultant demand and surplus doesn't flow offshore. The changes required to our tax and policy settings to make this happen appear to be beyond the comprehension of Govt's advisors, our political leaders, and the commentariat.
What changes to tax and policy would you make JF?
Depends on your objective. I would want to encourage enterprise and low-pollutant exports, discourage rentierism, reduce our vulnerability to fossil fuel price shocks, and run the economy at genuine full employment.
So, from a policy perspective, I would push for Danish-style collective agreements and worker representation, big funding boost for our major tertiary institutions as part of a strategy to make NZ one of the top few places to study in the world, huge 20-year cost of living infrastructure programme - public house building, green infrastructure etc, including solar, offshore wind, public transport, student / apartments. I would also offer a job / training / education guarantee for all 16 - 24 year olds. It is criminal how poorly we look after our young people.
Tax wise - a capital gains tax is blindingly obvious, but I'd include inheritance. I'd slap a big tax on imported passenger vehicles with engines above 1600cc, and ramp up tax on higher incomes (explicitly linked to the infrastructure programme).
This would involve running the economy hotter, which would risk inflation and blowing out our current account deficit; hence the need to reduce fossil fuel and car imports, and tax more income away.
Pretty hard to argue against any of this. Just about Denmark, are you aware of their “Ghetto” policies? Areas with high concentrations of non-Western immigrants, previously labeled “ghettos” (now called “parallel societies”), are subject to aggressive integration and de-concentration efforts, including forced relocations and housing policy interventions.
We think of Denmark as an open. tolerant, fair, and pragmatic society. But the above suggests they're also quite strict about how they want people to interact.
Sounds like RSE
But you've missed the fix...you can now deduct 20% upfront...BOOST is literally in the name!
I think we are pretty f*^ked aren't we, government wallet closed, household wallet closed, farmers wallet maybe creaking open but anyone who has dealt with a cocky knows they hardly spend like drunken sailors...but the good news is house prices are falling aye Gecko 🥳😂
I don't know what the best pathway out of this is...but for today, going back to enjoying my coffee in the warm winter sun is the priority anyway.
Well Simeon Brown just announced how they are going to legislate targets into the health system - Health BOOST!
Bishop is pushing for rewrites and exemptions to building plans... Building BOOST! (or Legal Battles BOOST!)
Van Velden is pushing for workplace injuries... ACC BOOST!
National's flagship childcare rebate policy ($150 a fortnight! *per household) - IRD Admin BOOST! (and quietly returning the money back to the government as no one is really able to claim it)
It certainly sounds more exciting when one just uses BOOST all the time #growth #boost #backingkiwifarmers (am I missing any other slogans?)
Great article and analysis. My only quibble would be the view that lower interest rates will spark a recovery. Low interest rates are a lagging indicator that suggests a very weak economy. Demand leads economic recovery - not low interest rates.
Unemployment is still rising with ongoing job cuts in the public sector and a drip, drip of job losses in the private sector. While this continues fear of un-employment will keep consumers cautious.
It's also worth questioning how accurately the official unemployment rate reflects reality.
The Stats unemployment rate is based on the Household Labour Force Survey (HLFS), a rotating panel survey of 15,000 households, just 0.56% of the population. It's not derived from actual WINZ or IRD data.
Yes - that is a very strange situation - the actual hard data figures for unemployment sit with WINZ and the number of employed wage earners is known by IRD. Why isn't the hard data being used in place of a quarterly survey of a tiny portion of the population?
Because there is a big chunk of the population out of work and not claiming benefits (i.e. not known to IRD). The HLFS looks at how many of that group are actually looking for work (in the labour force).
Numbers of those pulling their kiwisavers under hardship will be masking some of the unemployment, but that could be hard to separate from those on a benefit and also pulling kiwisaver to keep the mortgage. Any ideas how we could decipher that for better analysis?
Fiscal impacts are not mentioned at all - as though the biggest investor and employer in the county has no effect on the economy. Weird - the government is irrelevant apparently and just needs to 'get out of the way' by reducing spending and lowering taxes.
It's not new a new idea - this is standard economic thinking since the 1980's and is repeated every single time National are in government and for the most part voters are happy with it and believe it is the only way forward.
The significant halt to economic development and progress that takes place - whenever we elect National - is ignored by the commentariat and business sector in particular.
By stopping roughly 6000 KO housing units mid-flight the Nats rug pulled the whole primary and secondary construction industries. There's real pain out there. They can talk big on zoning reforms and new highways but at this rate they won't be around after the election anyway
That was a strange action and I've tried to think what they were aiming for by doing this - the only thing I can come up with is - the government was targeting inflation in building costs and so they were prepared to smash the sector hard. (I wonder how many in the building sector hated the 'woke' Labour government in 2023).
Probably the only significant impact has been to drive skilled tradies and business operators off shore - making it harder and more expensive to build again in the future - when the economy, eventually, recovers.
Party ideological - they don't believe government can deliver housing even though they had evidently already started.
Partly political - they were building KO units in or close to leafy suburbs and school zones which was causing big kerfuffles (note that a lot of KO land in these suburbs is now being sold).
I also think they were seeing that delivery of units was suppressing house prices, which is not what they or the landlorders really want despite what they say. For me actions speak louder than words.
I am not sure crappy KO housing units could suppress house prices, but a big impact if built right next to you.
Houses are still falling and are way lower then peak in Auckland, the peak was so high they are still expensive, even though its common to see houses sell now that would have got the vender 30% more in late 2021.
I see the government doing nothing to try and support the market, they know its just to big to save.
Thanks for explaining - I think something that Kiwi's missed is the reason for building social housing in middle class suburbs. This is standard practice in places like Singapore, Australia, the UK and most of Europe - deliberate housing policies to create mixed socio-economic communities - the children of the middle-class are socializing and learning alongside the children of a single mum on the benefit. The bankers children live next door to the factory worker. The benefits are social and focused on cohesion and building genuine bonds across the population. Very standard run of the mill New Deal policy that blows the minds of nearly every commentator in NZ.
Thanks for explaining - I think something that Kiwi's missed is the reason for building social housing in middle class suburbs.
Because Aotearoans look at social housing as a hand brake on their "pot of gold" - a house price that appreciates more than their ability to save.
For most people who purchased around 2000, there house has made them more then their job for years on end , its like you had one job to pay the bills and one job to save for the future... who needed to save with so much fun to be had.... bang it on the mortgage with a top up.
Then the fun stopped.
...& every single time Labour are in govt our grandchildrens debt blows out, last time another $100Billion.
With nothing to show for it.
I asked Chat GPT to help me craft a response - here's what we ended up with:
New Zealand’s public debt is still low by international standards, even after COVID. The real question isn’t just how much was borrowed—but what it was used for.
Labour governments have typically borrowed to invest in public infrastructure that improves living standards: more state housing, upgraded hospitals and schools, better public transport, and social support that helps families. These are long-term assets that benefit everyone—not just short-term spending. These are assets that will benefit our grandchildren - government investment is building their future.
AI doesn't know where the 100Bil went either....
Come on you know where it went. It has become the financial assets of the wealthy. It is backing your pension, accident insurance, investment funds, bank equity etc.
Heard in the last week another hospital blowout. This would have started under Labour as its been going for at least 4 years. Taranaki Base Hospital extension. From Simeon Brown https://www.beehive.govt.nz/release/59-million-boost-ensure-completion-… What surprises me no blame on Labour party. Suspect Dunedin being bigger and more noise about it's blowout that small change of a few million don't make MSM.
"Labour governments have typically borrowed to invest in public infrastructure" Labour party - how much do you need? We'll sign the cheque. A billion or a few xtra million overshoot. No worries.
It's criminal to rug pull the hospital for Dunedin, as they have such a large catchment area to cover. I can tell you for a fact that Kew hospital in Invercargill is running on fumes (I know workers there) and people regularly get sent to Dunedin for operations after turning up for operations, and having to be bumped due to urgent cases.
Disregard this article completely, the data is utterly out of date. Yes, the March 2024 quatery GDP figures will likely better than last year, but these are figures 3-5 MONTHS OLD, and things have deteriorated significantly since April 2025 ! How do I know this ? Because I own businesses and I regularly talk with other businesse owners in various fields.
We need GDP figures released in a much more timely manner !
Field Day felt positive this year...
Well, I'm not seeing anything on Main St that would suggest the economy is back on growth mode. Apart from farmers, it's a fairly benign environment out there. None of the business units in my company have hit budget this year; the upper north island in particular.
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