The Roundup – August 2025
A Boost for a Bumpy Recovery
Data for Q2 showed NZ annual inflation rose 0.2% from three months earlier, to 2.7%. Local authority rates and rent were the largest upward contributors, while lower petrol prices helped to limit the extent of the increase. More broadly, domestic inflation factors have been easing, whereas tradeable inflation (influenced by foreign markets) has risen.
While the latest level continues to head towards the upper band of the RBNZ’s inflation target, the trajectory was inline with expectations for inflation to rise in the near term before converging to target (2%) in mid-2026. It also marks the fourth consecutive quarter CPI has been within the Bank’s target band.
GDP data for the first quarter of the year showed the New Zealand economy continued to crawl out of recession, generating 0.8% growth over the 3 months, and building on a positive prior quarter. In contrast, high frequency indicators suggest the recovery stalled in Q2, with economic activity likely to have contracted.
This is in line with anecdotal evidence of businesses still struggling and supported by data published in August which show a 26% year-on-year increase in the number of businesses going into liquidation. The construction and hospitality sectors have been two of the worst hit. However, in the context of the total number of companies in NZ, this remain slow.
Insights into the health of the Kiwi consumer also reflected the challenging economic environment. With total consumer arrears (30+,60+, and 90+ days overdue) lifting to 12.41% in July. However, there were some positive trends emerging, with late-stage and mortgage arrears easing, suggesting early signs of stabilisation.
The domestic housing market remains subdued, with the July nationwide average house price still around 13% off the 2022 market peak. This reality has contributed to reduced consumer spending, as a decrease in perceived wealth (asset values) typically triggers increased saving (and reduced spending) behaviours, an effect known as the Wealth Effect.
But there have been some signs of increased market activity more recently, with new mortgage lending up 24% in the July quarter compared to the same period a year earlier. With 36% of all fixed rate mortgages due to mature in the next six months, securing lower interest rates should help homeowners to replenish depleted savings levels.
Meanwhile, unemployment remains elevated having reached 5.2% in the June quarter (the third consecutive quarter over 5%) but is likely much higher given the number of Kiwis that have headed offshore. While regionally the highest unemployment rate was seen in Auckland, which accounts for around 38% of NZ’s economic activity, at 6.1%.
When the RBNZ last met in May, they held interest rates unchanged, which was in part due to the heightened levels of uncertainty posed by international policy developments and the unknown impact they would have on the New Zealand economy. However subsequent data releases have continued to highlight the challenging environment facing NZ.
The extent and projected persistence of the spare capacity in the economy factored heavily into the Reserve Banks most recent OCR decision in August. The outcome was a 0.25% reduction to the OCR (now 3%) to help support the economy. Additionally, the Governor noted that if things continue to unfold as forecast, more rate cuts could be on the way.
The question now is whether the full effects of interest rate reductions will be enough to flow through to the economy and lift activity, or if cautious consumer behaviour will further dampen growth activity? Promisingly, early indicators for Q3 GDP are positive.