“The New Zealand economy is recovering after a period of contraction. High commodity prices and lower interest rates are supporting overall economic activity,” the Reserve Bank (RBNZ) said in its Monetary Policy Statement.
That’s not what I’m picking up anecdotally, but then I confess I’m a city dweller.
If you’re an urban retailer, if you’re in construction or professional services, or the creative sector, it doesn’t feel like much of a recovery at all.
Some big parts of the economy, like construction, are probably still in recession.
That bites especially hard in Auckland with its property-fuelled economy.
Unemployment is expected to keep rising, the latest business and consumer outlook surveys show confidence falling.
The Reserve Bank’s own forecasts are pretty grim. They show the economy continuing to run well below capacity.
The RBNZ has lowered its GDP growth projections since February. It now sees just a 0.4% increase for the March quarter, 0.3% for June and 0.2% for September.
I heard the new acting Governor Christian Hawkesby grilled about this by Mike Hosking on Thursday morning.
Hosking is good at painting a stark picture of the grimy, mean streets of downtown Auckland.
Hawkesby acknowledged the economy runs at different speeds and is still struggling in many sectors.
He noted this gave the RBNZ confidence that inflation would stay suppressed.
That’s one of the few consolations about a recessionary economy.
As to why the bank didn’t consider cutting rates harder, Hawkesby noted the OCR has already come down a long way.
He pointed out there is still a lot of stimulus to flow through from those cuts.
That’s a fair point.
Assistant Governor Karen Silk illustrated it further in an interview with the Herald’s Wellington Business Editor Jenée Tibshraeny.
She noted that as of March, the average interest rate banks received on their stock of loans was still 6% for mortgages and 6.38% for business loans.
These rates weren’t too far off their peaks of 6.39% for mortgage rates in October 2024, and 7.91% for business loan rates in April 2024.
Currently, you can fix for a year at 4.85%.
What’s happened is that we have record numbers of mortgage holders sitting on more expensive floating rates as they wait to lock in at the lower fixed rates.
That ought to start happening with more speed in the next few months as the RBNZ’s rate track suggests we’re probably only getting one more cut this year.
That last rate cut is now priced in by markets, so unless something really bad happens, mortgage rates are about as low as they are going to go.
Silk said the bank’s stock of loans would be an average of 5% by March next year.
That means the Reserve Bank can afford to take a wait-and-see approach, confident that the conditions are still increasingly stimulatory.
It’s a good position to be in because, given the uncertainty around the state of the global economy, it needs to be cautious.
But there is a simpler reason to be confident in the economic recovery.
Agricultural commodity prices are booming.
In March, DairyNZ said the 2025/26 season could be one for the history books if farmgate milk prices stayed around $10/kg for the second time in a row.
If that pans out (and it is still on track to), dairy’s contribution to the economy would increase by about $10 billion over two years, compared to previous, more moderate milk price outcomes of around $8.50/kg.
Beef prices are at record highs, and the kiwifruit growers just sent off their largest ever harvest.
Despite the best efforts of countless tech sector conference speakers, the primary sector still accounts for nearly 60% of New Zealand’s total export earnings.
So it is safe to say there will be plenty of cash flowing into the economy this year and next.
What’s less clear is how quickly that extra revenue will provide a boost to the urban economy.
Despite being the big earner for the country, the primary sector only accounts for about 6% of GDP.
The services sector accounts for 74%.
The bulk of the nation’s economic activity happens in cities and involves Kiwis doing stuff for other Kiwis.
The New Zealand economy is clearly running at two speeds.
The latest GDP data we have shows the agriculture, forestry and fishing sector grew at 4.4% in 2024.
Construction contracted by 7.3%! The goods-producing industries (manufacturing) shrank by 3.9%, retail by 1.8% and business services by 2.1%.
So far this year, economic indicators show a slight improvement for manufacturing and retail. But the services sector remains recessionary.
That explains why most Kiwis don’t feel like the economy is improving.
This will create headaches for the Reserve Bank as it looks to assess how low interest rates will go.
Those feeling economic pain aren’t going to stop complaining about it.
Meanwhile, human nature is such that those experiencing the good times usually don’t shout about how good things are.
A two-speed economy isn’t a new thing.
A cultural divide between town and country has always existed to some extent in New Zealand.
But it was never as wide as it is now.
Growing up in New Zealand in any decade of the 20th century, almost everyone had some family connection to a farm, and most kids had something of a feel for the look and smell of the places.
Sheep dog trials were a top-rated televised sport, and our most popular comic character was a laconic farmer called Fred Dagg.
We have to assume that an export recovery will eventually flow through to a wider economic recovery.
But as far as I can see (and please correct me if I’m wrong) there is no economic research that tells us how quickly or comprehensively that happens.
It’s worth noting that this is the right sort of recovery for balancing New Zealand’s economy.
In this country, a two-speed economy where the cities are humming and the rural sector is struggling usually means economic growth built on house prices, immigration and government spending.
I don’t think we can afford one of those debt-fuelled booms right now.
Liam Dann is business editor-at-large for the NZ Herald. He is a senior writer and columnist, and also presents and produces videos and podcasts. He joined the Herald in 2003.
