ANALYSIS: Since August last year, I’ve been warning Kiwis that the following long list of factors will hamper the strength of New Zealand’s economic recovery in 2025. I first made the list to dissuade people from taking risks that could not be justified by the mediocre outlook. Now, I’m repeating it to remind people that the recent uncertainty unleashed by the US President isn’t the only thing they should be concerned about.
1. After the recessions of 1991, 1998, and 2009, exporters led the upturn, helped by the 10-15 cent fall in the Kiwi dollar. That is not in play this time around, with the Kiwi dollar roughly where it was two years ago.
2. Households face higher outgoings for electricity, insurance, and council rates.
3. Young people face the weakest jobs market most will have ever seen, and their feelings of job insecurity will restrain their willingness to spend.
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4. Overspending by the previous government has led to a tightening of fiscal policy by the current government. If the government does not return the Crown’s books to order, New Zealand’s credit rating may be downgraded and interest rates could rise. Standard and Poor’s has just warned that could happen in Australia if the government there is re-elected this weekend and follows through on its new spending promises.
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5. China accounted for 7% of New Zealand’s export receipts when the free trade agreement started in 2008, peaking at 33% in 2021. Now, China has some substantial economic problems to deal with, and there are no easy gains for New Zealand to reap. Twenty-seven per cent of the country’s export receipts come from China, and with growth deeply threatened by the US-initiated trade war, the previous growth surge looks like it will recede.
6. Growth in inbound tourism has largely stalled, the sheep and beef sector is shrinking (good meat prices for now though, along with dairy), and an oversupply of townhouses in New Zealand’s two biggest cities means falling multi-unit construction projects through to possibly 2027.
Add to the above list the new trade war, which put the brakes on the global economy and brought back the spectre of rising inflation. Those are reasons enough for households to rein in their spending, and for businesses to pause hiring and investment plans.
Independent economist Tony Alexander: "There is a recovery underway in our economy, but it will be a relatively mild one." Photo / Fiona Goodall
But will these negatives tip New Zealand’s economy back into recession, after it recorded growth of 0.7% in the December quarter last year? Probably not. Interest rates have fallen by 2% and will go slightly lower for floating and short-term fixed rate products.
There is increasing scope for growth in the export education sector as Australia increasingly discourages foreign students, including with a new proposal to lift student visa fees.
Prices being received by dairy producers in international markets are elevated, and this will greatly boost the economies of New Zealand’s dairying regions. However, there will be some offset now that butter sells for $9 for 500gm locally.
Real estate and home lending activity have picked up since the middle of 2023, and businesses are still strongly indicating plans to boost capital spending in the various regular surveys produced in New Zealand.
There is a recovery underway in our economy, but it will be a relatively mild one when we take into account especially the absence of a large NZ dollar decline and the presence of the worst trade war and set of “beggar-thy-neighbour” tariff policies since the 1930s Great Depression.
- Tony Alexander is an independent economics commentator. Additional commentary from him can be found at www.tonyalexander.nz
