Stronger-than-expected growth led by exports and manufacturing
New Zealand’s economy likely grew faster than the Reserve Bank (RBNZ) expected in the March quarter, according to ASB economist Wesley Tanuvasa (pictured).
“We think the economy expanded 0.7% over the March 2025 quarter, stronger than the RBNZ’s 0.4%,” Tanuvasa said. “Growth is mostly accounted for by strong primary and manufacturing activity, reflecting a robust start to the year for dairy, meat and fruit exports.”
Construction may have turned a corner
After a tough run, construction appears to be stabilising.
“We think the bleeding (finally) stopped for construction, further supporting goods production,” Tanuvasa said.
Concrete production rose 1.4%, while residential building activity climbed 2.6%.
Mixed services, cautious households
The services sector remains patchy, with tourism supporting activity in some areas, ASB reported.
“Services are expected to stay mixed, with resilient tourism supporting strength in wholesale and discretionary services, while pockets of weakness in public services remain,” Tanuvasa said. “But Kiwi spending still looked cautious to start 2025. There seems to be a two-speed economy at play.”
Export gains vulnerable to global tensions
Despite solid export-led growth, Tanuvasa flagged risks from geopolitical developments.
“We think downside growth risks still have credence because what’s driving growth is vulnerable to a tariff hit,” he said. “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.”
Good news for now, but resilience will be tested
Tanuvasa noted: “A higher starting point for GDP and the modest repair of interest-rate sensitive sectors like construction, suggest a turning point. That’s a good news story in a sea of bad news stories.”
Still, he cautioned, “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.”
OCR pause in July likely, but August cut not ruled out
Looking ahead to monetary policy, Tanuvasa said: “On balance, a more resilient economy supports our view that the RBNZ will pause in July.” However, “the behavioural implications of the near-term spike in inflation complicate that task, as per the concerns of the lone MPC member in the May statement.”
Domestic fragility remains beneath the surface
Despite the quarterly uplift, challenges persist.
“Annual per capita growth is expected to remain negative, underscoring the view that many New Zealanders are still surviving, not thriving,” Tanuvasa said.
The ASB economist also noted, “We suspect Q1 private consumption was stagnant,” and that the domestic economy remains “surprisingly fragile.”
Global uncertainty clouds the outlook
Trade tensions and tariffs remain key risks.
“A materialisation of any of these conceivable risks, or any other Trump-related roadblock, may push the RBNZ to reconsider its neutral bias on easing,” Tanuvasa said.
ASB still expects rate cuts later in 2025
“We’ve pencilled in 25bp cuts in August (3.00% OCR) and October (2.75% OCR) in recognition of these risks,” said Tanuvasa. Still, he emphasised, “For now, there looks to be time for the RBNZ to assess global developments, before deciding on an appropriate policy response.”
ASB chief economist Nick Tuffley noted: “A July OCR cut cannot be ruled out, but there is value in waiting. The high starting point for inflation and inflation expectations suggests no imminent need for the OCR to move lower, absent of a large global downturn. There is a case for holding OCR settings until more clarity emerges… It is difficult to know precisely when the OCR will be cut — future OCR decisions over 2025 are all effectively ‘live’.”
Westpac’s Michael Gordon also expects another rate cut this year, but “not at the next meeting.”
RBNZ governor Christian Hawkesby has likewise stated that a July cut is “not a done deal,” and the central bank has “no bias” on the direction of the next move.
Bottom line: a resilient start, but watch for turbulence
“A more resilient NZ economy to start 2025 suggests that the RBNZ can be patient,” said Tanuvasa. But with exports exposed and households hesitant, momentum may be tested in the second half of the year.
