End of year economy outlook: housing, US President-elect Donald Trump, and jobs. Composite image / NZME
In 2024 we won the war on inflation but recession, business failures, and rising unemployment have muted the celebration. For many people, it was a year of survival - in fact “survive ‘til ‘25″ becoming the rallying cry.
But what does 2025 have in store? With interest rates coming down there are expectations that we can put recession behind us. But the recovery won’t be a straight line.
We asked some of New Zealand’s leading economists what they think the three biggest issues to watch will be in 2025.
In 2023, when we asked the same question, inflation topped the list of concerns. It still features but not to the same extent. The other key areas for 2024 were migration - which was then running at record high levels - and fiscal policy.
Now it seems the focus has turned to jobs and unemployment. The second most picked issue was around the global economy including trade, Donald Trump and his tariff plans, and China.
Third place was a close call, but interest rates and housing combined as a strong theme underpinning growth in the year ahead.
As usual, we’ll also include some of the topics that got a mention as finalists.
Migration features again after a complete turnaround that now sees it looking like an economic headwind due to a change from many to low numbers of arrivals. Inflation still worries some and fiscal policy and government spending remain in the spotlight.
Here’s what the economists had to say:
“Given we are still (technically) in a recession, the unemployment rate has to be pretty high on the list,” said Kiwibank chief economist Jarrod Kerr.
“The unemployment rate lags behind almost all other data, but it is directly linked to stress in the system, including bank defaults. When I ask business owners about their recruitment plans, I hear about headcount reductions (not expansion). It is a stark reminder that the unemployment rate is still rising, and has a ways to go.”
Kiwibank’s forecast peak is still 5.2% by mid-2025, with an upside risk of 5.5%.
“We’re currently sitting uncomfortably at 4.8%. When we get worried is when the unemployment rate spikes sharply above 6 or 7%. That’s when defaults start kicking up.”
Higher interest rates through 2024 will continue to limit spending until households refix, said Infometrics chief executive Brad Olsen.
“Business could well remain subdued and weaker through the first half of the year. If that’s the case, job activity will remain down too as businesses need fewer staff to work with fewer sales and less business – which is already seen in the higher unemployment rate over 2024 and forecasts for further increases into 2025.”
“So far, it has risen less quickly than the RBNZ thought it was going to have to in order to get on top of domestic inflation pressures,” noted ANZ chief economist Sharon Zollner.
“Will the relatively good news continue, or is it about to gap higher? Firms are increasingly confident better times are ahead, but can they hold on?”
Westpac’s chief economist Kelly Eckhold suggested job adverts will be a good indicator to watch for early signs of where unemployment is headed.
“Businesses are talking a more positive story for 2025, but this will tell us whether they’re willing to put their money where their mouth is. Relatedly we will be looking out for signs that improved New Zealand job market conditions are helping arrest the outflow of Kiwis that has been so strong this year.”
BNZ head of research Stephen Toplis warned that despite the labour market weakening “it is somewhat perverse to say it but skill shortages are likely to hamper New Zealand’s economic expansion from lack of folk to build our infrastructure to lack of doctors and nurses to service our health system”.
The global backdrop has become a lot rockier over the past few months, said Eckhold.
“There could be big implications for New Zealand. We have started to see a bit of a purple patch emerge for some commodity exporters and a significant improvement in the terms of trade,” he said.
A key issue will be whether this improvement can continue.
“A fly in the ointment is the changing political landscape in the United States. President Trump is set to pursue more expansionary fiscal policy (including tax cuts). He’s also looking at imposing tariffs on a number of America’s trading partners, including China.”
While it will be some time before we see exactly what form the new US administration’s policies take, the coming year is likely to see a stronger US dollar and related downward pressure on the NZ dollar, he said.
“That will help to buffer New Zealand exporters if trade with the US or other regions takes a turn down. But it could also mean higher imported inflation more generally, which would be an important consideration for the RBNZ when deciding how far to ease policy.”
Principal economist at NZIER Christina Leung agrees. She warns that increasing talks of tariffs and other trade barriers, particularly from the US, “poses downside risks to global trade, and in turn the global growth outlook”.
“Besides the direct risk to demand for New Zealand exports, our recent research (for Spark and ASB) on the key drivers of productivity growth found exposure to international competition contributes to improved productivity through motivating firms to innovate in order to compete harder,” she says.
“Hence increased protectionism poses a downside risk to the New Zealand economy in many ways beyond our exports.”
Toplis also sees the global economic outlook as being at the mercy of Trump and the extent he delivers on his promised policy measures.
“New Zealand is a small, open economy, highly leveraged to global growth shocks,” he says. “In this regard, Trump’s tariff policies have the potential to lower global growth and raise global inflation (at least in the short-term).
“Potentially this could mean a lower growth, higher inflation economy for New Zealand accompanied by a lower NZ dollar and higher interest rates.”
The big one to watch is what exactly Trump does on trade policy, and gauging the flow-through to New Zealand’s economy, says ASB chief economist Nick Tuffley.
“Already we have seen the NZ dollar/US dollar dip slightly in response. What global impacts will there be and will the NZ dollar actually provide some offset in the short-term?”
Kerr bemoaned Trump’s unpredictability.
“I wish there was a Trump index … it rises when he slaps a tariff on or insults a world leader. And it falls when he negotiates a ‘deal’ miles short of what he said he’d do.”
“Housing is always a must-watch, though for now there’s not much to see,” says Zollner. “But interest rates are now lower, so it’s a question of what the upturn looks like – half-hearted or enthusiastic?”
Eckhold says that New Zealanders have “long had a love affair with housing (though for many of us it’s a love-hate relationship)”.
“And for better or worse, a lot of New Zealanders’ wealth is tied up in housing assets – be it the family home or some form of investment property,” he says.
“As a result, changes in house prices have a big impact on household wealth levels and spending.”
With interest rates dropping sharply in recent months, Westpac expects the housing market will turn higher over the coming years.
“We’re forecasting prices will rise by 8% in 2025 and 5% in 2026. While that may sound high after the weakness in recent years, that sort of house price growth has been fairly average for the New Zealand economy,” he says.
“That pick-up in the housing market is likely to boost consumer spending appetites, especially for furnishings and other household durables. It’ll also be important for encouraging new housing development. But if the market gets too hot, it could also have an impact on the RBNZ’s policy stance.”
Kerr agrees: “The housing market is pretty important, even if it’s just for confidence among households and small business”.
“If the housing market recovers as expected days to sell will fall, and we’ll be upgrading our growth numbers.”
For Leung, the pace at which interest rates fall will be key.
“Many households have already been fixing their mortgage rates at the shorter end in recent months in anticipation of lower interest rates, with over half of mortgages now due for repricing over the coming year,” he says.
“Given borrowers have traditionally tended to fix at the one to two-year fixed terms, this recent development should mean a faster transmission of changes in the OCR to the broader New Zealand economy.”
Olsen also puts the focus on interest rates falling and homeowners refixing at lower rates in 2025.
“As that happens, households will have more free cash to spend that was previously supporting higher mortgage payments, which should support an upturn in retail activity and broader household spending,” he says.
“Savings rates will also be falling, meaning savers will either want to spend a bit more, or more likely search for a better return.”
There is a question over where interest rates go from here, he says.
“How quickly does the Reserve Bank continue to cut the OCR in 2025? When do they stop cutting (and where is the new ‘neutral’ OCR)? How much pass-through of OCR cuts to retail rates occurs?
“What will happen on the international rates front, with the potential for US rates for example to not come down as much as expected?
“All of these various factors will dictate when in 2025 spending picks up stronger, and the degree to which spending might improve out there in the economy.”
While there were a few themes that dominated this year, there was also a range of other issues that our economists see as important in 2025.
Kerr, Tuffley, Olsen and independent economist Cameron Bagrie still had inflation in the mix.
“The RBNZ is still waiting on non-tradeable inflation to fall, yet tradeable inflation could rebound even more if the New Zealand dollar remains under pressure,” says Tuffley. “Will or won’t the RBNZ curb its enthusiasm for having the OCR quickly back near a neutral level?”
Bagrie notes that non-tradeable inflation is still elevated.
Olsen warns that energy prices could be an issue, potentially keeping inflation higher next year.
Kerr is more concerned about the RBNZ overdoing it.
“If we’re right, and inflation undershoots the RBNZ’s 2% target midpoint … then there’s a strong argument for more RBNZ rate cuts. We think the cash rate should drop to the lower side of the 2.5-to-3.0% neutral guesstimate.”
Kerr also argues that migration remains important.
“The flows reflect the strength of the labour market, relative to Australia and elsewhere. We’re seeing a record outflow of Kiwis, and now a lift in migrants heading offshore.
“The net migrant inflow has dropped from +140k to below 45k. That may continue. There’s a lot going on beneath the surface, so we’ll be watching with interest.”
Bagrie also highlights fiscal policy as significant.
“I don’t think the fiscal targets being set are achievable anymore,” he says. “We need to move on, set new targets and invest with discipline so new targets can be achieved.”
Olsen agrees, warning: “future budget allowances are below the forecast cost of inflation to current services, meaning further reprioritisations will be needed in 2025 and beyond as the Government looks to rein in spending and deliver better value for money”.
NZ Initiative chief executive Oliver Hartwich takes a similar stance but suggests looking at the Government spending to GDP ratio.
“Following the pandemic, this ratio has undergone a structural shift, with government spending settling at a permanently higher level,” he says.
“This will be a crucial indicator of whether fiscal consolidation efforts are succeeding and if we are making progress in restoring fiscal buffers. Given its relationship to inflationary pressures and long-term fiscal sustainability, this ratio warrants close attention.”
Hartwich also suggests watching our GDP per capita and current account deficit.
“Projected at 4.7% of GDP for 2025, our current account deficit remains a structural vulnerability,” he says.
GDP per capita deserves special attention as we are experiencing an unusual combination of record migration and weak productivity growth, he says.
“While headline GDP figures might show modest growth, per capita GDP has been declining. With the Treasury’s downward revision of productivity growth estimates, this indicator will be crucial in understanding whether New Zealanders’ living standards are actually improving or deteriorating.”
Finally, Bagrie offers up some food for thought with a broader social issue he believes is hampering our economic progress.
“My number one issue remains division. It’s not an economic indicator but it’s a corrosive issue and it’s a global theme.
“Just look at the US election and its potential consequences. We have dissatisfied populations and extremism. It is not good for society or economic policy settings.”
Liam Dann is business editor-at-large for the New Zealand Herald. He is a senior writer and columnist, and also presents and produces videos and podcasts. He joined the Herald in 2003.
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