The outlook for global growth is cloudier than ever. And it’s not just tariffs that we are now grappling with. News of Israel’s missile strikes on Iran rattled financial markets at the end of last week. The conflict continued over the weekend and, in an unprecedented move, spread to the energy sector with an exchange of strikes on refineries and gas facilities. Naturally, oil prices have surged, and investors have flocked to safe haven assets. Gold, in particular, has benefitted, nearing record-highs. But in a rather head-scratching move, US treasury yields climbed on the risk-off news. The atypical reaction may tempt some to question the safe haven status of US treasuries. But the move likely reflects concern over a resurgence in inflation, especially if the conflict does not de-escalate quickly enough.

As a small open economy, we’re especially vulnerable to a disruption on the global stage. So where does the Kiwi economy go from here? These days, the multiverse feels acutely vast as news headlines roll in. The future may unfold in many different ways. As we note in our updated outlook, the balance of risks is skewed to the downside for the Kiwi economy in the near term. But we maintain a sense of optimism into 2026.

The Kiwi economy was poised, primed and positioned for a recovery. Timely economic data were showing promising signs of a turnaround in activity. From PMIs popping into positive territory, to healthy export earnings for the rural sector. But the beginnings of our economic recovery – as fragile as it was – has largely been driven by the external sector. And it’s the external sector which is most vulnerable to the risks offshore. A certainty amidst all this uncertainty, is that a slowdown in global growth is inevitable. The likes of the IMF and OECD have slashed their forecasts, just as we’re starting to get back on our feet.

The NZ economy crawled out of a deep, deep hole last year. We continue to expect economic growth in 2025, but at a much slower pace. We forecast the economy growing just 0.9% this year, down from our previous forecast (which was already below-trend, and consensus) of 1.4%. Our previous house price forecast has proved too optimistic, as high levels of stock have flooded the market. We still (somewhat optimistically) expect to see a lift in prices over the spring and summer months, recording a 2-3% gain by year end. Trailing the broader economic cycle, a further loosening in the labour market is expected before employment growth rebounds into 2026.

We see a near-term spike in inflation to 2.7% this year. But there’s no need to panic. The implementation of higher tariffs will likely reduce medium-term inflationary pressures. Import prices will likely fall as exporters adjust to weaker global demand. Trade diversion will also weigh on import prices. Goods made in China and destined for the US, may wash up on our shores at a discount.

For the RBNZ, they will need to move policy settings from restraining the economy to supporting it. The outlook requires further easing. The RBNZ has delivered 225bps of cuts since August 2024, and we forecast another 75bps to set policy at more stimulatory levels. A 2.5% cash rate is still our forecast terminal rate, although the path toward is shrouded in uncertainty.

Back to the present, more like the past, this Thursday we will see how the Kiwi economy performed at the start of the year. And we’re expecting another strong result. By our estimates, the Kiwi economy likely grew 0.7% over the March quarter, matching the same pace as the Dec24 quarter. On an annual basis, we expect the Kiwi economy to be 0.8% smaller than this time last year. It should also be noted, importantly, that Thursday’s data won’t reflect the more recent, likely negative, effects of tariff uncertainty on Kiwi growth yet either.

What the data will likely show is a real divide between the sectors that are indeed thriving, and those that are still in survival mode. The modest and still fragile recovery that we’ve seen to date has been largely concentrated across the primary industries, with particular strength across the agricultural sector. Supported by stronger export prices (up 17% over the year to March) and a weaker Kiwi dollar earlier in the year, we expect activity to have lifted further in Q1.

That momentum has also flowed through onto food manufacturing and the broader manufacturing sector. Alongside PMIs in expansionary territory, and manufacturing sales volumes up a solid 2.4% over the quarter, we’re expecting a solid 1.5% lift in manufacturing growth over the quarter – if realised, that would mark the sector’s strongest performance since the end of 2021. However, it seems like the return to strength for manufacturing may be short lived. The latest PMI survey for May revealed a sharp fall back into contraction across almost all sub-indexes and points to a weaker June quarter (see our COTW for more).

Beyond that, we expect the flow through of lower interest rates to continue breathing life and activity back into other sectors of the economy. Retail and wholesale should benefit as household disposable incomes recover and discretionary spending gradually picks up.

Still, not all sectors are feeling the relief just yet. Particularly not construction. While indicators like building consents and work put in place suggest the sector may have found a floor, we still suspect construction remained subdued over the quarter.

Financial Markets

The comments below were provided by Kiwibank traders. Trader comments may not reflect the view of the research team.

In rates, mountain of mortgage fixing hangs over the market

“Last week Kiwi rates were characterised by persistent cross market underperformance largely concentrated in the short end. The short end anchored in place by the looming risk of a strong GDP print as well as a mountain of mortgage fixing still hanging over the market. Reports of missiles fired into Iran managing only briefly to induce a rally.

In contrast soft US inflation data resulted in further easing from the Fed being priced, now implying two cuts into the end of the year. The long end of the Kiwi curve was more susceptible to moves in global yields seeing the curve flatten 5bps over the week.

Contradicting the recent narrative of a rebounding economy was a very weak PMI on Friday, dropping back well into contractionary territory. Regardless of being very lagged and backward looking, the focus will be on the GDP this week as the only major data release before the July MPR. Selected price indices, out this week, will also be closely scrutinised given the laser focus on inflation mandate by the RBNZ. We also hear from the Fed, Bank of Japan and Bank of England, all expected to be unchanged and will reinforce expectations for a hold domestically at the July meeting.” Matthew Crowder, Balance Sheet Manager – Treasury.

In currencies, volatility muddies the view

“Last week the Kiwi held onto firm footing in the 0.6035-0.6050 levels with a couple of runs higher on the back of US dollar weakness. After opening the week at 0.6013, the Kiwi quickly traded to 0.6061, and then oscillated around 0.6035-0.6055 for the first half of the week. Trade tensions were smoothed in the first couple of days of the week, as the US and China came to an agreement around rare minerals, which provided optimism for Financial Market participants. Mid-week trade tensions escalated again, after Trump announced that they would be putting pressure on negotiations in order to reach agreements within 2 weeks on his global reciprocal tariffs. Increased tension around trade saw a brief sell off for the antipodean currencies. The Kiwi dipped to a low of 0.6014, but then rallied to a high of 0.6070 as the US dollar fell to a low not seen since 2022. This was broadly on the back of falling sentiment around the US economy, and also the US CPI print, which came in softer than anticipated, and saw traders take the view that the Fed is more likely to cut rates further in 2025. Friday saw a big escalation in geopolitical tensions in the Middle East, as Israel launched an attack on Iran, which has only escalated further over the weekend. The Kiwi closed the week at 0.6015, as the US dollar rallied as a safe haven. This week we will hear from the Federal Reserve, following their FOMC meeting. The market sees them as broadly on hold for this meeting, but their commentary will be key to help provide a view on where they may go from here. On Thursday we have the NZ Q1 GDP print, and also Aussie employment, both of which combined may provide further direction for NZDAUD. This currency pair has been pinned close to the 0.9270 level over the last week, trading in a fairly tight range of 0.9257-0.9306. Our view on the NZDUSD, in a more medium term, is that there is still likely to be further US Dollar weakness, even as geopolitical tensions increase, with the Greenback behaving less like a safe haven of late. We think Greenback upside may be limited. The topside focus we mentioned last week is still in view, with 0.6170, the multi-year downtrend resistance level, still in play. However with risk aversion aplenty, this top side level is not likely to be achieved this week. We see a likely range of 0.5985-0.6070. However, further upside could occur with a dovish Fed view, or a de-escalation in Middle East tensions.” Mieneke Perniskie, Trader - Financial Markets.

Weekly Calendar

Suit up for Super Thursday this week

• First up is the Fed meeting: The Fed is widely expected to keep rates unchanged as it opts to wait for greater clarity on the impact of tariffs on the US economy and inflation. The tone and updated forecasts, including the dot plot, will be of key focus. Following a softer than expected core inflation read over May, markets are pricing in two 25bps of rate cuts by year-end.
• Then, we turn to domestic news, with the release of March quarter GDP which will provide an update on the state of the New Zealand economy at the beginning of the year. Economic output is expected to expand 0.7% over the quarter, a strong result but one that hides an uneven recovery. The primary industries likely led growth over the quarter, but activity across construction and retail remains subdued. A 0.7% quarterly gain lifts output to 0.8% below pre-recession levels. The Selected Price Indexes for the month of May will also be a key data release this week.
• Wrapping up the day is Aussie jobs data which will likely show a slowdown in employment growth. Around 20k jobs are expected to have been added in May, fewer than April's surprisingly strong 89k gain. The unemployment rate is expected to remain at 4.1%. The key data release for Across the ditch, Aussie jobs data will likely show a slowdown in employment growth. Around 20k jobs are expected to have been added in May, fewer than April's surprisingly strong 89k gain. The unemployment rate is expected to remain at 4.1%.

See our Weekly Calendar for more.