Taking Stock - 18 September 2025

“Far from collapsing, the economy is laying the groundwork for recovery.” That was the message from four of the country’s leading chief economists at a conference David and I attended in Auckland. I was struck by how different their tone was from the headlines.

Confidence is in short supply and reports of bankruptcies, unemployment, and people heading across the Tasman don’t help. Yet the fundamentals tell a different story. Household incomes have been rising, our agriculture and dairy sectors are thriving, farmers are reducing debt, export prices are higher than a year ago, and interest rates are falling.

One thing to remember is that bankruptcies and unemployment are lagging indicators. They tell you about the pressure of the last six or twelve months, not where the next six months are heading.

These are real stresses, but they are not at catastrophic levels.

It is tough to see businesses liquidate, and for those involved it can be devastating. Yet across the wider economy, new opportunities do emerge. Job advertisements are starting to increase again, and employers know how hard it is to rehire, so they are holding onto staff, which is exactly what you would expect if they believed things would improve. The latest Trade Me job market survey shows that 35 percent of employers are planning to expand. The job market is weak, but it is not broken.

Confidence is the missing ingredient. It collapsed quickly, and with a little luck it will recover just as quickly.

In New Zealand only a small percentage of loans are floating, so the effect of lower rates takes time to roll through the system. Australians feel rate cuts straight away because most of their mortgages are floating, so changes in interest rates flow through faster. Here the benefits take longer, but once people start locking in the new lower rates, they will feel more secure, cash flow will free up, and confidence might follow.

In 2020 the Reserve Bank cut the OCR to just 0.25 percent, and mortgage rates fell below 3 percent. As global conditions shifted, inflation pressures emerged and the OCR was lifted sharply to 5.50 percent in 2023, which caused floating rates to increase above 8 percent.

The OCR now sits at 3.00 percent and is expected to move toward 2.50 percent. As a result, 5-year mortgage rates are likely to settle closer to 5 percent, while one and two year fixed rates could drop to around 4.50 percent. That will put real cash back into households.

Confidence tends to return quickly once borrowers roll onto lower rates.

But it is important to remember that interest rates move in cycles. The relief we are seeing now will not last forever, and within a few years the Reserve Bank will raise rates again.

Households should use this period to reduce debt and strengthen their position before the next cycle turns, while also allowing for some increased spending.

Even though interest rates have started to fall, many borrowers are still paying the same amount to their bank each month. Instead of cutting repayments they are using the chance to reduce debt. That conservatism is frustrating if you want spending to recover faster, but it is also a strength because it means households are coming out of this downturn with healthier balance sheets.

Reducing debt now is too important to ignore. It is the right choice, and it will set households up for a stronger recovery when lower mortgage rates finally flow through.

While households have been cautious and reducing debt, many councils have gone the other way.

In Wellington, gross debt was $944 million in 2022 and is forecast to reach $2.1 billion within the next six months. Wellington rates have risen more than 50 percent over the past three years. 

That divergence matters.

Households are strengthening their balance sheets while local government is weakening theirs, creating very different starting points for the recovery.

Agriculture will play a big role in the recovery. Farmers are in a stronger position than many city businesses, with dairy payouts remaining high. The ANZ Commodity Price Index shows how volatile this year has been. Dairy surged early, fell through the winter, and has since stabilised. Beef prices remain firm on strong North American demand, while lamb has softened recently but remains at strong levels overall. Aluminium has been a quiet outperformer, trending up despite global tariff shocks, which will affect construction prices.

Forestry has been the weak spot, reflecting China’s property slowdown, though it did show a modest rebound in August. The unusual part of this cycle is that farmers have been paying down debt instead of spending, which has slowed the flow through effect to the wider economy. 

That will not last forever. With more cash flow and stronger balance sheets, rural spending will pick up and help fuel the recovery, particularly when billions from Fonterra’s Mainland sale are returned to farmers. Regional New Zealand is already looking better than the cities, and that strength will spread.

The building sector is also showing signs of turning. The Master Builders State of the Sector report found that around 60 percent of building firms expect the economy to improve over the next 12 months, and a similar number expect their own business conditions to lift.

Two thirds of homeowners reported no significant delays in recent build projects. Costs, finance, and regulation remain constraints, but some of the regulatory issues are being addressed. At the same time, the pipeline of work is improving and regions are leading the shift. This is the sort of momentum that typically comes at the early stages of recovery.

Migration is another factor. Many people have left for Australia, but their labour market is softening. We have seen this story before.

When unemployment rises across the Tasman, some of those workers return, and new arrivals fill the gaps. Migration cycles with the economy, and there is no reason to think this time will be any different. The concern is that every time we lose an engineer, builder, or skilled worker, it becomes harder to build the homes and infrastructure that New Zealand needs. Replacing that capability takes time, and it will be one of the challenges of the next cycle.

Our other long term challenge is productivity, which has been weak for years and caps how fast the economy can grow. Even so, the signs of recovery are clear, and they are happening despite these headwinds. Embracing technology and AI should help to increase productivity.

The housing market, which is always central to the New Zealand story, has likely reached the bottom of the cycle. Prices are unlikely to rocket back up, but they do not need to.

Stability is enough.

Home ownership is still the largest form of saving for New Zealanders, and it gives families and communities an anchor. The three key drivers of house prices are interest rates, migration, and sentiment. Interest rates are easing, migration will swing back, and sentiment will improve as confidence returns.

When prices do start to rise again, they will add further support to confidence. Housing wealth has always played a central role in household decision making, and even modest gains help people feel secure enough to spend. The difficulty is that residential construction is running at low levels just as our population is growing.

That imbalance will only worsen the supply shortage and push prices higher over time. Some of the country’s largest home builders are the retirement village operators, and many of them have slowed construction. That will exacerbate the shortage while at the same time increasing the value of their assets.

Once Summerset completes its current pipeline of villages, its asset backing per share will likely exceed $20. Ryman’s development programme is expected to lift its net tangible assets to above $7.00. These long term dynamics point to higher house prices, stronger balance sheets for the retirement sector, and renewed household confidence.

It is easy to criticise New Zealand’s reliance on property, but the fact is it has protected households through this downturn. People have continued paying their mortgages, reducing principal even when they could have taken the pressure off. That behaviour has built resilience.

When mortgage relief does come through, spending will recover faster because households feel secure.

Global factors will continue to matter. Tariffs from the United States increased from 10 percent to 15 percent in July, but the actual impact has been small so far. Beef is largely protected by product mix, though wine is more exposed. The bigger question is China, where the slowdown in the property market is affecting forestry. For now, demand for our core commodities remains strong, and ANZ’s index shows export prices are still higher than a year ago. That strength underpins our economy.

Beyond this, the global backdrop is becoming less stable.

Analysts note the world has been drifting away from the US-led multilateral system of the past 75 years toward one with more frequent shocks, less predictable growth, and higher inflation risks. Trade tensions and tariffs are part of this shift.

While New Zealand’s commodity demand has held up, we cannot assume global conditions will be as supportive as they were in past cycles. This adds a layer of uncertainty to the recovery story and reinforces the need to strengthen our domestic position.

The Reserve Bank’s latest Monetary Policy Statement and ANZ’s Quarterly Economic Outlook tell a consistent story.

GDP shrank slightly in the June quarter and is expected to grow 0.4 percent in September, with annual growth for 2025 sitting at 0.7 percent before likely picking up to around 2.7 percent in 2026 and 2027. Unemployment is forecast to peak at about 5.3 percent this quarter before easing.

A broader measure of the labour market shows that around one in ten workers either want more hours or are available for work, which is keeping pressure off wages and inflation.

Annual inflation is now 2.7 percent and is expected to edge up to 3.0 percent in September before falling back toward 2 percent by mid-2026. The Official Cash Rate has been cut to 3.00 percent and could fall to 2.5 percent by year end.

The Reserve Bank expects rates to bottom out in 2026 before eventually rising again when demand strengthens.

It is easy to forget how quickly sentiment can change.

We are at the point in the cycle where people look at the data and struggle to believe it. They see signs of improvement, but they are still cautious.

Then suddenly confidence shifts. Households feel secure, they start spending, businesses invest again, and the cycle turns. At that point the conversation changes. Instead of asking how far rates will fall, people start asking when the Reserve Bank will need to lift them again.

That is the point I want to emphasise.

Rates are falling now, and they may fall further over the coming year, but it is not too early to think about when they will rise again. The cycle always turns, and when confidence comes back it usually bounces harder than people expect.

New Zealand’s conservatism can be frustrating.

We are slow to spend, cautious about debt, and too often we argue about infrastructure rather than just building it. But those same traits mean our banks are stable, our households are prepared, and our economy is set up for recovery.

Agriculture is strong, households are paying down debt, and interest rates are heading lower.

The fundamentals are intact.

This is why I’m optimistic. It might not feel like it yet, but confidence does return, and when it does, it often lifts the whole economy faster than people expect. Mortgage relief will free up cash flow. Farmers will spend again. Migration will stabilise. And when those things line up, spending will recover.

By then we will not be talking about interest rate cuts. We will be talking about when will rates rise again.

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Travel Dates

24 September – Lower Hutt – Fraser Hunter

24 September – Napier – Edward Lee25 September – Wellington – Fraser Hunter

30 September – Taupo – Johnny Lee

1 October – Hamilton – Johnny Lee (full)

3 October – Tauranga – Johnny Lee (full)

7 October – Palmerston North – David Colman

8 October – Christchurch – Johnny Lee (full)

21 October – Levin – David Colman

22 October – Wellington – Fraser Hunter

22 October – Blenheim – Edward Lee24 October – Nelson – Edward Lee

Edward LeeChris Lee & Partners Ltd