Rural cashflows, housing confidence, and exports underpin rebound
After the 2025 Q2 GDP contraction, ASB now sees the economy “on the mend”, with growth expected to rebound in late 2025 and move above 2.5% for a period, reflecting both payback from “unusual seasonal weakness in Q2” and a broader recovery.
According to ASB, the Reserve Bank (RBNZ) still needs growth running above the roughly 2% “speed limit” to absorb spare capacity. Lower interest rates are lifting consumer spending on vehicles and other durables, with a moderate construction pickup expected over the next year.
Exports are also set to improve after a period of global uncertainty, with US‑bound shipments “resilient so far in the face of the tariffs added this year”. Strong commodity returns and cash from Fonterra’s consumer brands sale are expected to “increasingly support NZ’s rural regions”.
“The economy does look like it is turning the corner after a rocky ride since last year’s sharp recession,” ASB chief economist Nick Tuffley (pictured) said. “The evidence of green shoots has been a bit more obvious in some areas lately.”
Households: Spending recovery broadens
Household spending has been recovering since late 2024, when the average mortgage payment peaked. In heavily discounted areas, the rebound shows up more in volumes than in dollar spend.
Rising volumes of big‑ticket items point to improving confidence. House sales have lifted gradually, while electronic goods and car sales have seen much stronger volumes in the year to September.
By contrast, volumes of non‑durables such as food and groceries have been flat as food price inflation in 2025 has “chewed into income growth”.
ASB expects consumer spending to strengthen further over the next year and become more broad‑based. As borrowers refix at lower rates, cashflows should improve. Employment growth is “starting to turn the corner”, lifting household income. Inflation is likely to be more moderate, and a slightly stronger housing market should support further durables spending.
“There are already signs of a greater ability and willingness to spend,” Tuffley said. “Consumer spending has already been lifting for a year, and in the September quarter consumers went nuts in electrical and electronics stores. Not only that, they were busily buying up cars to rush themselves around to all the sales.”
Housing: Flat prices now, modest gains ahead
After a flat 2025, ASB forecasts a modest housing market recovery in 2026, driven mainly by lower mortgage rates rather than population growth. Net immigration inflows are expected to remain muted.
The starting point is a high level of listings, with new properties coming to market faster than they are sold and ongoing construction adding to supply. That imbalance is likely to keep prices “quite flat” until sales volumes are strong enough to run down stock.
Mortgage rates are now “about as low as they are likely to go”, reducing the incentive for would‑be buyers to keep waiting. Improving confidence in the wider recovery and a gradually better labour market should also lift activity.
Conditions for first‑home buyers are described as very favourable: bank test rates have dropped substantially, there is plenty of choice, and incomes have outstripped house prices in recent years.
ASB expects house price growth of around 3–4%, given plentiful supply and only muted population growth.
Inflation: Off the peak and easing ahead
Headline inflation rebounded to 3% in 2025 Q3, as widely anticipated, but domestically driven non‑tradable inflation continued to moderate.
With wage growth slowing after an unemployment rise and a large degree of spare capacity following “nearly three years of the economy going sideways”, further softening is expected.
Core inflation measures have also continued to ease, reinforcing that underlying pressures are moderating. The recent rebound has been heavily influenced by a jump in food prices, partly reflecting higher food export prices, alongside rises in vehicles, recreational goods and faster‑growing electricity costs as levies fund transmission infrastructure.
ASB expects traded goods inflation to moderate over the next year, helping overall inflation move towards the 2% mid‑point of the RBNZ’s target. Spare capacity should restrain price increases, while insurance, electricity and council rates are also expected to rise more slowly than in recent years.
“Also a positive, the high inflation rate this year will increasingly subside over 2026, easing pressure on household budgets,” Tuffley said.
Interest rates and NZD: Easing done, markets look ahead
RBNZ cut the official cash rate (OCR) by 25bp in November to 2.25% and currently judges it has done enough to keep inflation “propped up around 2% over the next couple of years.”
ASB’s base case is that the OCR is on hold, with risks skewed toward further easing in 2026 if medium‑term inflation proves more subdued than expected. With a sizable output gap, the main risk is that the recovery falls short, extending downward pressure on prices.
Market rates appear to have passed their lows for this cycle, now that the RBNZ is seen as finished with cuts.
“That means declines in borrowing rates have very likely come to an end – unless 2026 starts looking like Groundhog Year,” Tuffley said.
The New Zealand dollar has underperformed most major currencies as RBNZ cuts have outpaced those of other central banks, with the yen a notable exception after its own recent weakness.
ASB expects the NZD to outperform in 2026 as domestic and global growth recover and risk appetite improves.
Rural sector and tariffs: Solid incomes underpin regions
ASB sees a “good rural income backdrop” as an increasingly important support for the wider economy, once farmers and growers have strengthened their balance sheets after challenging seasons.
Although dairy prices have edged down from their peaks, this season’s milk price is still at a good level, and Fonterra farmer‑shareholders are likely to receive a $3.2 billion capital return. Some of that will be saved or used to pay down debt, and some will be invested on farm or otherwise spent.
Beef export prices have been “rocketing” and New Zealand has so far coped “fairly well with the impact of US tariffs”, with around 25% of US‑bound goods having had the 15% tariff removed.
As Tuffley puts it: “Even the US government has learned that you can’t mess with the price of a hamburger.”
Jobs market: Stabilisation after sector‑specific pain
After a period of job losses concentrated in IT/media/telco, professional services, and public administration, the labour market is showing early signs of stabilisation. Job ads are trending higher again, and ASB expects 2026 to bring stronger employment prospects.
The combination of improving employment, easing inflation, and lower debt‑servicing costs should gradually reduce pressure on household budgets and reinforce the recovery in consumer spending.
Outlook: Bad news fades, but rate tailwind remains
ASB sees 2025 as drawing a line under much of the “bad” news, while also closing the chapter on OCR cuts.
“The main thing fuelling the recovery will be the low level of interest rates,” Tuffley said.
Even though cuts are likely over, their impact is still feeding through.
“The average mortgage rate only really started to fall rapidly from the middle of 2025," Tuffley said. "It’s now more than halfway through its likely fall from peak to trough, but that means there is still a substantial portion of NZ home borrowers who stand to benefit further.”
ASB expects growth to rise to an above‑trend pace of more than 2.5% in 2026 as better cashflows “start to leak out of people’s wallets”. Unless the recovery falters badly and “2026 starts looking like Groundhog Year”, borrowing costs now look to be at, or very near, their cyclical floor.
Read the full ASB economic outlook report for more information.
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