New Zealand Macroeconomics
Indifferent fundamental strength rating with a Bullish sentiment outlook
New Zealand shows promising economic recovery with bullish outlook amid ongoing RBNZ easing and dairy sector resilience
Indifferent fundamental strength rating with a Bullish sentiment outlook.
Economy showing early recovery amid aggressive monetary easing
New Zealand's economy is transitioning from contraction to recovery, supported by the Reserve Bank's significant interest rate cuts and impressive resilience in the dairy sector. The coalition government led by Prime Minister Christopher Luxon is actively pushing business-friendly reforms with an ambitious "Growth Budget" planned for May 22, 2025. Meanwhile, the country continues to carefully balance its Western security alliances with its vital economic interests in China.
RBNZ pivot and economic rebound gaining momentum
The Reserve Bank of New Zealand has cut rates aggressively, lowering the Official Cash Rate to 3.75% through a series of cuts totalling 175 basis points since August 2024. This monetary easing is starting to bear fruit as we're seeing improved business confidence, with the ANZ index reaching 58.4 and February's PMI at a healthy 53.9. While the January trade deficit of NZ$486 million disappointed expectations, the overall trend points toward economic stabilization. The New Zealand dollar remains under pressure at around 0.5710 against the USD, but this is actually benefiting exporters, particularly in the crucial dairy sector where production has grown by 3.1%.
Past seven months marked by RBNZ pivot and government reform acceleration
The past seven months have been transformative for New Zealand's economic landscape. The RBNZ made a dramatic policy shift, moving from a tightening cycle to an aggressive easing phase with four consecutive rate cuts that reduced the OCR from 5.50% to the current 3.75%. This monetary pivot occurred alongside a fundamental change in the RBNZ's mandate, with the December 2023 legislation eliminating the "maximum sustainable employment" objective and restoring the bank's singular focus on price stability.
The Luxon coalition government has been equally active, implementing substantial reforms aimed at reducing regulatory barriers and stimulating economic growth. Their efforts have included public sector spending cuts resulting in over 800 redundancies, regulatory overhauls across multiple sectors, and new initiatives to attract foreign investment. The government modified visa programs, restored interest deductibility for residential properties, and signed a comprehensive economic partnership with the UAE cutting tariffs on 98.5% of New Zealand exports.
In the past seven weeks specifically, economic indicators have presented increasingly positive signals. Business confidence has strengthened significantly, with the ANZ Business Confidence index rising from 54.4 in January to 58.4 in February. The manufacturing sector has shown notable improvement, as the Business NZ PMI increased to 53.9, firmly in expansion territory. While the January trade deficit disappointed at NZ$486 million, the dairy sector continues to show remarkable resilience with increasing production volumes and strong export growth in cheese, infant milk formula, and fat-filled milk powder.
The New Zealand dollar has remained under pressure during this period, reaching its lowest monthly close since 2009 in February. This persistent weakness has created mixed effects—increasing costs for importers and consumers but providing relief for exporters, especially in the dairy sector. Interestingly, despite the currency's weakness, positioning data indicates 76% of traders maintain long positions versus only 24% holding short positions, creating an intriguing divergence between market sentiment and price action.
Recovery momentum to build with dairy export growth and further rate cuts
Looking ahead to the next seven months, New Zealand's economic recovery is expected to gain significant momentum. Westpac forecasts growth of 2.5% in 2025, accelerating to 3% in 2026, driven by continued monetary support. The Reserve Bank is likely to maintain its easing bias, though perhaps with a more measured approach to further rate adjustments. The April 9, 2025, monetary policy meeting will be particularly important to watch, with market expectations suggesting the OCR might remain steady at 3.75% to allow time to assess the impact of previous cuts.
In the immediate term, several critical economic indicators will be released over the next seven weeks. Most notably, the Q4 2024 GDP data due on March 19 could confirm New Zealand's return to positive growth after previous contractions. The upcoming international investment summit in mid-March will also be pivotal in showcasing the country's business-friendly reforms and attracting foreign capital.
For forex traders, the New Zealand dollar is expected to remain weak in the short term, potentially declining to around 0.56 against the USD before showing signs of recovery later in 2025 as global conditions stabilize. This continued weakness presents both trading opportunities and signals about New Zealand's competitiveness in global markets.
The dairy sector outlook appears particularly promising and should be closely watched by traders interested in the NZD. Farmgate milk prices remain high due to strong global demand, especially from China. Export volumes are projected to increase across multiple product categories, with continued growth in cheese, infant formula, and specialized milk powders. Given that dairy comprises over 40% of New Zealand's food and fiber revenue, strength in this sector has outsized implications for the broader economy and currency valuation.
However, several risks remain on the horizon. The most significant external threat comes from escalating US-China trade tensions, which could disrupt global trade flows. While these tensions create potential headwinds, they might also present opportunities for New Zealand as an alternative supplier to China if US agricultural products face retaliatory tariffs. Domestically, the sustainability of the economic recovery remains somewhat uncertain, dependent on both continued monetary support and the successful implementation of the government's growth agenda.
For currency traders specifically, the striking divergence between NZD positioning (predominantly long) and the currency's persistent weakness creates an intriguing dynamic that could lead to significant price movements in either direction, depending on upcoming economic data and policy decisions.
Sources
Reserve Bank of New Zealand, Statistics New Zealand, Trading Economics, Westpac New Zealand, ANZ Research, CLAL, RaboResearch New Zealand Agribusiness Outlook, RNZ, CMC Markets, DCANZ, FAS-USDA, Fonterra, New Zealand Treasury, FXStreet, Forex Client Sentiment, USDA Foreign Agricultural Service, Insider Week, Business NZ, New Zealand Ministry of Foreign Affairs and Trade, The Diplomat, New Zealand Parliament