Economic recovery looking unconvincing as it struggles to gain momentum

The labour market is a key factor for this year's prospects of an economic recovery, Infometrics chief forecaster Gareth Kiernan said. Photo / 123rf

Ten months out from the election, the New Zealand economy’s long-anticipated recovery is looking unconvincing, according to economists at Infometrics.

Infometrics’ latest indicators show momentum remains fragile despite fundamentals lining up like lower interest rates and healthy export incomes.

“Consumers and many businesses are fatigued after three years of stop-start conditions,” Infometrics chief forecaster Gareth Kiernan said.

“Households remain hesitant to embrace any potential upturn, especially given the false start of a recovery in 2025, with many people still unwilling to commit to major decisions.

“Although some indicators have improved, the overall momentum has been too patchy to fully restore confidence.”

Kiernan said the labour market was a key factor for this year’s prospects of recovery.

“Unemployment is forecast to stabilise at its current level of 5.3%, before beginning a gradual decline from the June 2026 quarter,” he said.

“This shift supports Infometrics’ upgraded GDP growth outlook of 2.5% for 2026, rising to 2.9% in early 2027 as broader activity strengthens.”

Westpac economists said they expected a 0.3% rise in employment over the December quarter, when labour market data is revealed next week.

“We expect the December quarter labour market surveys to show that the unemployment rate has reached [its] peak, with jobs growing just fast enough to meet population growth.

“As we reached the end of 2025, there was growing evidence that the New Zealand economy was moving into recovery mode. And while the labour market is typically one of the more lagging elements of the cycle, there were signs of stabilisation in this area too.”

Meanwhile, Kiernan said inflation remains a key risk to the interest rate outlook.

“Annual inflation of 3.1% has increased the possibility of the Reserve Bank [RBNZ] needing to lift interest rates earlier than previously expected.

“We still anticipate the first official cash rate increase at the end of 2026, but if economic growth accelerates and inflation keeps surprising on the upside, the RBNZ might need to move sooner.”

Kiernan said household spending remains the weakest part of the recovery story with cost-of-living pressures still weighting on budgets.

But it was also the most important driver of further economic momentum, he said.

“Infometrics expects spending growth to lift gradually towards a peak of 3.3% per annum in 2027.

“However, the limited response to lower mortgage rates so far suggests that downside risks to this forecast remain, even with the average interest rate across all mortgage debt easing to around 4.7% in the second half of this year.”

Kiernan said the economy has the ingredients for recovery.

“An improvement in the labour market will be needed to increase household confidence and build further momentum.

“The fundamentals are lining up – we just need businesses and households to be confident enough to start acting on them.”

Earlier this month, ASB senior economist Mark Smith said they we’re now seeing more encouraging signs.

“There’s still work ahead, but the foundations for a more balanced 2026 are taking shape.”

Smith said a tightly contested election raises the risk of short‑term fiscal decisions at a time when long‑term discipline is needed.

He said New Zealand’s government debt has steadily increased over recent decades, and cross-party alignment on long‑term issues such as infrastructure, climate planning and retirement savings will be essential.

“The temptation to loosen the purse strings is real in election years, but New Zealand needs a stable and strategic fiscal approach to support a sustainable recovery,” Smith said.

“We need to take more of a long-term view if New Zealand is to maximise its considerable potential.”