It’s Simply Softer, And Slightly Smaller, Than Expected, And We’re Crawling Into Some Fierce Headwinds

• The Kiwi economy ended 2025 with just a modest lift to growth. Economic activity lifted 0.2% over the December quarter, 1.3% over the year. The economy is simply softer, and slightly smaller.
• Most industries saw an increase in output. But most of the strength in today’s report came from industries tied to the tourism sector. We knew that was coming. Just like we knew construction would remain a major drag on activity.
• But that was then, and this is now. And we’re now looking into some fierce headwinds. The escalating conflict in the Middle East, and the resulting lift in oil prices have added significant downside risks to growth (globally). Heightened uncertainty is likely to prompt businesses to pull back, rising fuel costs will further squeeze household budgets, and a global slowdown could weigh heavily on Kiwi exports. Our shining star, tourism, could come under pressure.

Today’s economic report card for the Kiwi economy came in broadly as we expected. Growth was modest, showing some signs of progress. But it was not enough to encourage much hope for uncertain recovery ahead.

Output lifted 0.2% over the December quarter, just shy of our forecasts for a 0.3% lift. Meanwhile, the impressive 1.1% lift in activity originally reported for the September quarter was revised down to a softer 0.9%. From the Reserve Bank’s perspective, the combination of softerthanforecast quarterly growth alongside the revisions to historical data points to a weaker starting point for the overall size of the economy. In effect, the downward revisions leave December’s level of output virtually unchanged from where September was originally estimated. And that matters. A smallerthanassumed economy implies weaker domestic inflation pressures, with the output gap closing more slowly than expected.

Other than that, today’s report card offers us very little new insight. The start of the tourist-heavy summer kicked off strongly. With international arrival numbers at their highest since Covid (97% of pre-covid levels), we saw an impressive 7.8% in our travel export services over the quarter, taking our export service volume well beyond pre-covid levels. And as such sectors tied to the tourism industry led most of the growth throughout the quarter. The rental, hiring, & real estate group led the charge. Though with no help really from the real estate component. The retail trade & accommodation group was also strong. But again, mostly thanks to the accommodation component. It’s nice to see tourism as a shining star. But we are wary of the best bit falling away again. We are wary of the potentially severe impact of the surge in oil prices... and airfares... emanating out of the Middle East. Airlines have slashed flights, and lifted airfares. That does not bode well for tourism. Although we hope we get some tourists wanting to get away from all the madness north of the equator. Somewhat optimistic we know.

On the other side of the ledger, construction continues to be a significant drag on activity, with the stale housing market still struggling to breathe life back into the sector.

Overall, we've managed to produce just 1.3% of growth over 2025, and just 0.7% on a per head (capita) basis. We're still struggling. And that’s before the sharp deterioration in the outlook over the past three weeks given the conflict in the Middle East.

Today’s data is old. It covers the last 3 months of last year... and we're 3 months into this year. So it's more about the starting point (weaker) and momentum into this year (weaker). This is not an economy demanding RBNZ rate hikes to fight off a supply-side shock to oil. The potential damage to demand outweighs the lift in inflation.

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