There is no doubt that the last couple of years have been financially stressful for everybody – that is, most households as well as businesses. This ‘across the board’ impact is typical of the bottom of an economic downturn. That’s where the good news comes in. Economic cycles, by definition, come and go with their rises and falls. Once a recession is fully played out, it can take only a small trigger to reverse the motion.

Rising costs still putting pressure on wallets

Consumers are still reluctant to spend, driven partly by uncertainty over job security, and partly by continued financial stress due to rising costs. Unemployment remains high at just over 5% and businesses are failing due to reduced demand. Local authority rates, power and insurance premiums have been big contributors to inflation over the last year and because they’re not ‘nice to haves’ they are not sensitive to changes in monetary conditions.

Whereas in a recession it is usual to see low inflation, that hasn’t been the case due to price increases in these items. The Consumers’ Price Index (CPI) increased by 2.7% in the year to June 2025 and may rise further. This is only just within the Reserve Bank’s target rate of 1-3%.

Housing sluggish, but share market steady

Another anomaly is the housing market. Despite low mortgage rates, house prices have increased by less than 2% over the last year nationwide and sales activity remains low. The Reserve Bank is expected to lower the Official Cash Rate from 3% to 2.5% by November, and this should provide a stimulus to both the housing market and the general economy. The risk is that inflation could nudge its way back up again, so the Reserve Bank faces a difficult task to stimulate the economy by just the right amount. Too much stimulation could lead to inflationary pressures, while not enough won’t get us out of the doldrums.

Alongside these factors, the Government is ploughing money into capital investment projects and while that should ultimately stimulate the economy, it may be a while before that happens. It takes time for injections of money to work their way through the economy. Businesses are still reluctant to invest due to uncertain conditions both globally and locally, although exports have been doing well.

In yet another anomaly, despite all the negatives the New Zealand share market has remained firm. There was a blip when Trump announced his tariff regime but it recovered and remains close to its post-COVID peak.

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