It was the year OCR cuts were supposed to kickstart the economy. In the event we probably needed to borrow a big battery and jumper leads. David Hargreaves reviews a suboptimal year

In trying to think of a title that captured the essence of 2025, the expression that stuck to me and wouldn't leave me alone was: 'The Year of Blurrrgh'.

And, no that's not very eloquent. But it does seem to fit.

You may or may not recall, but in the run-up to this year, a number of economists and commentator-types championed the phrase "survive to 25" - meaning that if we could all get through the tribulations of a difficult 2024 then we would enjoy better things in the next year, IE 2025.

But as ANZ chief economist Sharon Zollner recently quipped, "survive to 25 just turned into survive 25", which neatly describes how the year now nearly finished didn't quite live up to the expectations of some.

It's probably fair to say a reasonable number of economists and commentators were expecting that those wildly over-referenced 'green shoots' would by now be giving way to flowers. Instead we are all still rummaging around in our gardens looking for the shoots and some of us think we can see them coming now. Just don't tread on them.

What exactly happened this year?

Well, in my preview of 2025, I said, among many things, this:

Normally recessions come from some naturally occurring blow to the economy. The recession we’ve just had was engineered by the Reserve Bank (RBNZ). Does that mean it’s easier to fix?

The psychological impact of the interest rate reductions so far has seen a big improvement in the mood of the country. Business and consumer surveys are showing much greater confidence.

However, I think a still unanswered question is how much lasting damage has been done by the high interest rates. A concern throughout the 2021-23 Official Cash Rate (OCR) hiking cycle was always that people may have been doing it tougher than they let on.

It’s still possible therefore that the RBNZ ‘overcooked’ the rate hikes and the damage is greater than we might like to think.

Confidence can be brittle and easily knocked. So, it is still by no means clear that the upticks we are seeing in intended activity - as expressed, for example in business surveys - will convert to actual activity as 2025 progresses.

In trying to explain just what has happened in 2025 I'm certainly standing by those comments I made a year ago.

To highlight the main points in the economy in the past year, I give you some cold, hard, data, by quarter and including figures from the end of last year if those figures were announced during the course of 2025.

Here's the economic big three:

•The annual rate of inflation as measured by the Consumers Price Index (CPI) was 2.2% as of the December 2024 quarter, rising to 2.5%, in the March 2025 quarter, 2.7% in the June quarter and 3.0% in the September quarter.

•Unemployment stood at 5.1% in the December 2024 quarter and stayed there in March 2025, before rising again to 5.2% in June and 5.3% in the September quarter.

•Our economy, as measured by GDP, grew 0.4% in the December 2024 quarter, then 0.9% in the March 2025 quarter and then jumped off the cliff again with a 0.9% fall in the June quarter. We must wait till December 18 to see what happened in the September quarter.

For those who prefer to absorb their data visually, here's the same three things in graph form:

Well, what do we make of all that? Inflation was a disappointment given what we've gone through to get it down back well within the 1% to 3% target range, only to see it almost back out of the top again. And for all that the talk is that this will be short run, well, let's see. If our currency stays as weak as it is at the moment the anticipated fall back down of inflation to comfortably sit around 2% - which is what's expected - might not be quite such a shoo in.

In its November 2024 Monetary Policy Statement, the RBNZ, was spot on in forecasting unemployment rising to 5.1% in December 2024. But the central bank went early with its pick of the peak, saying that the rate would hit 5.2% in March 2025 (it was still 5.1%) and then falling to 5.0% by September. In the event, it was still going up in September (5.3%), with some hopeful signs that might be the peak - if the economy now starts to pick up.

And, yeah, well, what the hell did happen with the economy? To be honest, I think we have been let down badly with the calculation of our GDP figures this year. I recommend anybody who hasn't seen it to have a read of Westpac senior economist Michael Gordon's dissertation on our GDP figures and his conclusion, (in my layperson's terms) that the aftermath of closure of the Marsden Point oil refinery distorted the calculation of GDP by making it much more 'seasonal' in nature. Gordon estimated that our GDP might have risen 0.2% in the December 2024 quarter (0.4% was the reported figure), then 0.4% in March (0.9% reported) and then a fall of 0.1% (fall of 0.9%) in the June quarter.

These figures sound about 'right' to me based on how New Zealand has 'felt' this year. What such figures would mean is that the apparent strong-ish pick up early in the year didn't really happen and the big mid-year slump was more of a stumble. So, blurrrgh, in other words.

Therefore it's looking more and more to me as if the rises to the OCR in 2021-23, and therefore subsequent increases in mortgage rates, were indeed overcooked. People for the most part coped with the increasing interest rate burden, but even though rates are now in retreat, financial buffers have been eroded and so, crucially, has confidence.

We end 2025 with the OCR at 2.25%, down from the 5.50% peak as of August 2024 and from 4.25% at the start of this calendar year. Now, there are those arguing that the OCR should have been dropped more quickly. But regardless of the size of the cuts, the reductions do take time to feed through into mortgage rates.

The two graphs below highlight, firstly, the weighted average rates for new mortgages taken up, and secondly the yields the banks are getting from their entire mortgage books.

Across their entire books, the banks were yielding just 2.83% on mortgages (that figure includes both fixed and floating) at the low point of the cycle, which was September 2021. The subsequent rise was substantial and didn't actually peak till October 2024, at 6.39% - AFTER the OCR was already on the way down. As of September 2025 the yield had dropped to 5.36%. 

And now, fresh from the horse's mouth and the newly minted November Monetary Policy Statement, the RBNZ says with close to 40% of fixed rate mortgages due to reprice over the December and March quarters, the average mortgage yield is expected to fall further, to 4.7% by September 2026 based on current market pricing.

So, it is gradually dropping, but is still way, way higher than a few years ago.

Regardless of how quickly or otherwise the OCR was cut, people were going to need time to adjust to lower rates. Those who had become accustomed to not spending were going to take time to get comfortable with the idea of spending again. It's not just like turning on a switch.

On top of all this, the uncertainty around tariffs would likely have been a big contributing factor to the stall that was seen in the economy in the June quarter. Businesses hate uncertainty more than anything else. And if they are faced with uncertainty they quickly go into a holding pattern. Which is what I think happened.

And whether we like it or not, we seem as a nation to derive a lot of our confidence - or lack of - from the condition of the housing market.

In the run-up to both 2024 and 2025 economists and the RBNZ were predicting pick-ups in house prices that didn't materialise. In its November 2023 Monetary Policy Statement (MPS) the RBNZ forecast that house prices would rise over 5% in calendar year 2024. They dropped over 1%. In the November 2024 MPS the RBNZ forecast an over 7% rise for the 2025 calendar year. That hasn't happened either and it'll be touch and go whether the final outcome for this year is either a very marginal rise or another small fall. I think the smart money is on a marginal rise, but it will literally be something like 1%. In fact the RBNZ's latest cut at it in the November 2025 MPS is for a 0.2% rise in the 2025 calendar year and then 3.8% in 2026.

Why has the market remained flat? Well, by most assessments our market was by no means 'cheap' back in 2019. And then came 2020 and the pandemic and then we had a period in which we added around 40% to prices that weren't cheap in the first place. And then we had big rises in interest rates just at a time when mortgages (due to the price rises) were becoming truly monumental-sized and leaving people fully exposed.

While the non-performing loan ratios have blipped up, it's not been to anything like the degree seen after the Global Financial Crisis. People have managed real well. But managing doesn't mean 'comfortable'. And it could just be that more people than we really know about have ended up in situations either with their own homes or with investment properties that are not ideal for them. And it could be that a lot of people would like to sort out the situation they are in before going forth again with new acquisitions. And remember, it does go against the grain in New Zealand to sell a house for less than we paid for it.

The housing market hasn't been getting the usual sort of support from net migration levels either. Rents have been flat in the past year, which won't have been of great encouragement to investors. In the 12 months to September, the country had a provisional net migration gain of 12,400, down from a 42,400 gain in the 12 months to September 2024 and a 132,700 gain in the year to September 2023.

So, we have a strange stand-still with the housing market at the moment.

And really, that's been a bit how New Zealand has been this year. 

I think the clear lesson to draw from it is that our economy takes more time than we might want to think to pick up from the impact of a Reserve Bank-induced recession. We don't just bounce back from a period of high interest rates. And it's worth bearing that in mind for the future. We can certainly have the debate about whether the RBNZ would have been better served by simply dropping the OCR like a brick and getting it down to the levels that it is now early this year. But that would have carried its own risks too.

As for how we end the year, well, there is talk that the economic recovery is finally moving into view. So, will 2026 be better? Well, as usual, I'm not making predictions, as such. But I will, in another article, have a go at pointing out some of the key things to be looking out for. Watch out for that in a few days' time.

*This article was first published in our email for paying subscribers early on Friday morning. See here for more details and how to subscribe.