Forecast Update: We’re Feeling Our Way Through

• News of tit-for-tat missiles strikes between Israel and Iran rattle financial markets last week. Troubling for the global economy and markets, the conflict has spread to the energy sector. Oil has surged and investors sought safe havens.
• We’ve updated our outlook for the Kiwi economy. And no surprises, we have downgraded our growth profile given heightened global uncertainty and a likely slowdown in global trade.
• Our COTW looks into the reversal in the manufacturing PMI, here at home. After four straight months of signalling expansion, the index is back in contractionary territory.

Here’s our take on current events

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 (see here) , 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.

Chart of the Week: Manufacturing momentum no more.

Last week our chart of the week focused on US PMI data. So naturally, this week we’re taking a look at PMI data here at home. After nearly two years of being in contractionary territory (a reading below 50), the Kiwi manufacturing PMI had found a breath of life over the start of this year. The first four months of 2025 saw the index finally back in expansion with monthly readings ranging between 51.8-54. At the same time, other sub-indexes of the PMI survey, notably production, employment and new orders were also signalling expansion. Momentum in manufacturing was clearly building over Q1, and we expect to see that reflected in this week’s GDP numbers.

However, it seems like the strength in the industry may be short-lived. Last week, the latest manufacturing survey saw the the index fall sharply from 53.3 to 47.5 in May. And, along with the headline rate, most sub-indexes posted a great fall too. For example, new orders dropped 5.5 points to 45.3. Meanwhile, the employment sub- index fell 8.9 points to 45.7 – the largest single monthly fall in the survey’s 22-year history!

Both offshore, and now at home, low confidence amid economic fragility and tariff uncertainty is resulting in softening demand and orders across manufacturing. And it’s something which could very well and quickly spread to other sectors of the economy. It’s under these conditions that we’re expecting a weaker Q2 GDP outturn than the strong prints over the summer period.

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