Lower interest rates are providing important support as mortgage holders pay down more debt. Photo / NZME
Lower interest rates are providing important support as mortgage holders pay down more debt. Photo / NZME
As New Zealand’s economy moves out of the shadows of recession, ASB economists have outlined five things to look out for in the year ahead.
ASB senior economist Mark Smith said while the headwinds haven’t disappeared completely, momentum is building, with 2026 holding the most promise in years.
“After atougher-than-expected 2025, we’re now seeing more encouraging signs,” he said.
“The global economy has remained resilient despite clear risks. New Zealand’s low interest rates are supporting activity, firms and households are in a stronger position, and the lower New Zealand dollar is boosting export conditions.
“There’s still work ahead, but the foundations for a more balanced 2026 are taking shape.”
Smith said households continue to feel the pinch of elevated living costs and a softer labour market, while, on the other hand, the Official Cash Rate (OCR) was providing important support as mortgage holders pay down more debt.
“Around 40-50% of fixed loans are set to reprice over the coming months, and we expect this will continue to lower the average mortgage rate from around 5% today to roughly 4.7% by the end of 2026,” Smith said.
“As households gain a little more breathing room, the improving domestic backdrop is likely to support consumer spending, business confidence and hiring.
“The New Zealand economic recovery isn’t firing on all cylinders yet, but it’s becoming more durable.”
Interest rate outlook
Smith said while further OCR cuts were unlikely in 2026, they couldn’t be ruled out if offshore or domestic conditions weaken.
The 200 basis points (bps) of cuts in 2025 – taking the OCR to 2.25% – was helping to support economic activity, he said.
“We currently expect 50 basis points of tightening from early 2027, but it wouldn’t take much to bring that forward or push it higher,” he said.
But there was little need for the Reserve Bank (RBNZ) to hurry in its tightening, Smith said.
Reserve Bank of New Zealand Governor Anna Breman. Photo / Mark Mitchell
New Zealand election
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.”
Powering AI
Smith said artificial intelligence (AI) offered a significant opportunity for New Zealand.
According to ASB research, AI adoption could add around $20 billion to real GDP by 2040, and wider benefits could flow from developing datacentre and digital infrastructure industries.
“With our high share of renewable electricity, New Zealand is very well positioned to support AI-linked growth. But energy security remains a major challenge, and we need the right infrastructure to make the most of this opportunity,” Smith said.
“AI won’t transform the economy overnight, but the groundwork needs to be laid now.”
A new world order
Global uncertainty will remain a defining feature of the year ahead, Smith said.
While global growth held up better than expected last year, shifting US trade policies, political volatility and upcoming US mid‑terms will require exporters to stay agile, he said.
“New Zealand exporters have shown strong resilience despite these disruptions. But the landscape is still evolving, and adaptability will be essential,” Smith said.
