Soft demand limits business recovery despite rate relief
New Zealand’s economic recovery remains fragile, according to NZIER’s Quarterly Predictions – June 2025 report, as lower interest rates support household sentiment, but weak demand continues to weigh heavily on business activity.
While business confidence has improved, caution still dominates decision-making.
“The NZIER Quarterly Survey of Business Opinion (QSBO) shows firms are cautiously optimistic. However, many are holding off on investment and hiring decisions until they have stronger conviction about a sustained recovery in demand,” said Christina Leung (pictured), deputy chief executive (Auckland) at NZIER.
The NZIER report highlighted that over 60% of firms cite weak sales as their main constraint – indicating that soft demand, not labour shortages, is the biggest challenge for businesses.
Falling mortgage rates support households but job market remains weak
Interest rate cuts are beginning to ease pressure on households, especially as mortgage repricing accelerates.
“The easing in interest rates has begun to flow through to households. With over half of New Zealand mortgages due for repricing in the coming six months, many households will likely face further reductions in mortgage repayments,” Leung said.
“This is expected to underpin a continued recovery in retail spending, though the weak labour market continues to temper the improvement in consumer confidence.”
Construction and investment remain sluggish
While some areas are beginning to stabilise, NZIER notes that residential construction demand remains soft, as shown by subdued consent issuance data. Broader business investment is also slow to rebound.
“More broadly, businesses are deferring investment in the face of heightened uncertainty and subdued profitability despite falling borrowing costs,” Leung said.
Budget 2025 introduced a targeted “investment boost” via accelerated depreciation, aimed at lifting productivity.
ASB chief economist Nick Tuffley noted the scheme should improve upfront cashflows and incentivise business investment—but warned that far more will be needed to close the productivity gap with Australia.
Export outlook clouded by US-China tensions
This quarter’s special feature focuses on escalating trade tensions between the United States and China, and their implications for New Zealand’s export sectors.
“As New Zealand’s two largest export markets, trade policy shifts between the US and China carry downside risks and potential opportunities,” Leung said.
While dairy and meat exports remain resilient, “sectors like forestry and aluminium are already experiencing price pressures due to global uncertainty, particularly given the exposure of these commodities to investment demand.”
Further OCR cuts forecast amid global volatility
Recent financial market movements have fuelled expectations for additional monetary policy easing. NZIER forecasts that the Reserve Bank will reduce the official cash rate again to stimulate demand.
“We forecast the Reserve Bank of New Zealand will lower the official cash rate to 3% by July to help support demand,” Leung said. “To the extent we see downside risks to the global growth outlook, there is the potential for further monetary policy easing beyond this.”
However, RBNZ faces a complex balancing act. Inflation expectations have recently lifted across all timeframes, and the Shadow Board members remain split – some advocating for caution and a hold at 3.5%, while others, including Kiwibank’s Jarrod Kerr, argue a 50bp cut is urgently needed to avoid prolonged stagnation.
