Business confidence up, trading conditions weak
New Zealand’s economy is showing a stark contrast between sentiment and reality, said Christina Leung (pictured), NZIER deputy chief executive and head of membership services.
“The continued divergence between firms’ optimism about an improvement in the general outlook and current weak trading conditions remains a key theme of the New Zealand economy,” Leung said.
She noted that although business confidence has improved since the Reserve Bank (RBNZ) began easing policy in August last year, lower interest rates have been slow to revive demand.
“The disappointing recovery reflects heightened uncertainty weighing on households and firms’ appetite to spend and invest,” Leung said.
Households still cautious despite mortgage relief
Leung said falling mortgage rates have provided relief for many borrowers, but household spending remains patchy.
“Despite relief from lower mortgage rates for many borrowers, the soft labour market continues to drive caution amongst households, with the recovery in household spending remaining patchy,” she said.
With around half of mortgages due for repricing within the next six months, NZIER expects further cuts in repayments to give households more breathing space.
“This should support a continued recovery in retail spending over the coming year,” Leung said.
ASB economists also noted that popular fixed rates between one and two years are now up to 2.6 percentage points below their 2022-23 peaks, with short-term mortgage rates likely to ease further if RBNZ continues cutting the OCR. However, longer fixed terms are less likely to fall, highlighting the trade-offs borrowers face when choosing mortgage strategies.
Global risks weigh on recovery
The global environment remains challenging, with trade tensions adding uncertainty.
“The United States announced in late July that it would impose a 15% tariff on imports from New Zealand… Increased US tariffs on imports from New Zealand could potentially reduce demand for New Zealand’s key exports to the US, such as meat and dairy products,” Leung said.
She added that wider tariff policies pose a “downside risk to New Zealand’s economic recovery.”
Inflation outlook and OCR cuts ahead
At its August Monetary Policy Statement, the RBNZ cut the official cash rate (OCR) by 25 basis points to 3%. While expected, markets were surprised by the downward shift in the central bank’s projected OCR track.
“The surprise was in the downward revision to the RBNZ’s OCR projection, which indicates two further OCR cuts are likely by the end of this year,” Leung said.
NZIER now forecasts the OCR to fall to 2.5% by November. However, near-term inflation is expected to tick higher.
“We expect annual CPI inflation to rise slightly above the top of the RBNZ’s inflation target band over the coming year, largely driven by higher food prices. Beyond 2025, we expect continued spare capacity in the New Zealand economy from the slow recovery, which will reduce inflation pressures.”
Outlook for mortgage advisers
For advisers, NZIER’s latest Quarterly Predictions highlight a mixed picture: short-term relief for some households as mortgage rates ease following recent OCR cuts, but broader caution persists due to weak demand, cost-of-living pressures, and global trade risks.
The NZIER report suggests further OCR cuts into late 2025, in line with ASB’s forecasts, which could push some short-term rates slightly lower but keep longer-term rates steady.
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