For those hoping this year will prove to be considerably less eventful, ASB says the past few weeks have been anything but that.
Senior economist Mark Smith and economist Wesley Tanuvasa say there is a lot going on, but there is now clear evidence of green shoots.
They remain cautiously optimistic about the recovery and highlight five key things to look out for this year.
1. Tug-o-war economic recovery
New Zealand starts the year with a recovery that’s been promising rather than spectacular.
Households continue to feel the pinch of elevated living costs and a softer labour market, while house prices have remained well below 2021 peaks.
However, the low Official Cash Rate (OCR) of 2.25% is now providing important support.
Private sector deleveraging (mortgage holders have made excess payments of $17.4 billion over the September 2025 year with low repayment deficiencies) and a period of cost cutting and restraint has left the economy better positioned to rebound.
The business environment is improving, with firms reporting stronger demand and improved profitability which should support spending and job prospects.
Hiring in now picking up, and tourism is also expected to lift, supported by a weaker New Zealand dollar.
The New Zealand economic recovery isn’t firing on all cylinders yet, but it’s becoming more durable.
2. Interest rate outlook
After several years of volatility, interest rates have settled into a more predictable pattern after 200bp of cuts last year. The OCR at 2.25% is supporting economic activity.
Monetary policy can affect confidence immediately but takes more time to impact cash flows. The effective mortgage interest rate is now closer to 5%, but the 140bp fall since its late 2024 peak pales in comparison to the 325bp of OCR cuts since August 2024.
With a sizeable chunk of mortgage refixing set to take place over the coming months (something in the region of 40-50% of fixed rates) this should bring down the average mortgage rate to about 4.7% by the end of the year, helping to support consumer spending. The risk is that the recent post November MPS jump in swap yields tempers this easing pipeline.
The housing market is expected to improve given improved affordability (prices lower than record highs, lower mortgage interest rates), but house price gains over this year will be limited to about 4-5% annually, given below-trend net immigration and the plentiful housing stock.
Views can rapidly shift around economic turning points, but Smith and Tanuvasa expect 50 basis points of tightening from early 2027.
“It wouldn’t take much to bring that forward or push it higher. The direction of the New Zealand economy and inflation, as well as global developments, will be key in shaping the path ahead,” they say.
3. New Zealand election
A tightly contested election raises the risk of short-term fiscal decisions at a time when long term discipline is needed.
New Zealand’s government debt has steadily increased over recent decades, reducing the country’s ability to respond to future shocks and putting greater pressure on generations to come.
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 and Tanuvasa say.
“We need to take more of a long-term view if New Zealand is to maximise its considerable potential.”
4. Powering AI
Artificial intelligence remains one of the most powerful global economic forces, with AI aligned companies and sectors continuing to outperform.
For New Zealand, the opportunity is significant: ASB research suggests AI adoption could add about $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,” the pair say.
“AI won’t transform the economy overnight, but the groundwork needs to be laid now.”
5. A new world order
Global uncertainty remains a defining feature of the year ahead.
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.
The looming US Supreme Court decision on tariff legality adds another layer of uncertainty. New Zealand exporters have shown strong resilience despite these disruptions, but the landscape is still evolving, and adaptability will be essential.
In short, there’s cause for optimism this year, even if we still need to navigate some uncertainties along the way, Smith and Tanuvasa say.
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