New Zealand Economy Showing Signs of Recovery Despite Lingering Stagflation
WELLINGTON, NZ - Despite persistent narratives of economic doom, recent indicators suggest New Zealand’s economy is navigating a challenging period of stagflation and showing early signs of recovery, according to analysis of current economic policy and data. While the path remains long and not without pain,the current government is implementing a multi-pronged strategy to address the complex issues inherited from previous administrations and global events.
The current economic situation isn’t a sudden development. Stagflation, experts note, “does not appear overnight” but is the result of “several years of poor macroeconomic management,” often exacerbated by external shocks. In New Zealand’s case, this included significant fiscal stimulus during the COVID-19 pandemic, coupled with what some economists have described as monetary policy missteps – specifically, a delayed response in raising interest rates. These factors were compounded by global supply chain disruptions, tight labor markets, and surges in global energy prices. Previous governments were also criticized for failing to adequately address underlying structural weaknesses,including low productivity and persistent current account deficits.
By the time the current government assumed office, the stagflationary spiral was already well underway. The challenge now is to unwind its effects, a process that historical precedent – including the United States’ experience in the 1970s - suggests takes “several years of disciplined, coordinated policy.”
The cornerstone of the recovery strategy is restoring price stability. The Reserve Bank of New Zealand is currently focused on its mandate to control inflation, having lowered the official cash rate from a high of 5.5% in 2023-24 to 3% currently. This easing of monetary policy is beginning to translate to relief for households, with one-year mortgage rates decreasing from 6.9% to 4.9% over the same period.
Alongside monetary policy, the government is pursuing a path of fiscal consolidation. While the government deficit has seen a slight increase, moving from $7.2 billion to $10 billion, it is on a “credible path toward long-term consolidation.” The government has committed to reducing the national debt and ensuring spending is both targeted and effective, acknowledging the delicate balance between tightening fiscal policy to control inflation and avoiding a deeper recession.
the government is prioritizing structural, supply-side reforms aimed at boosting productivity. These include regulatory reviews, a housing construction growth program, and reforms to the Resource Management Act. These initiatives aim to remove regulatory bottlenecks, lower barriers to trade, and accelerate infrastructure and housing development. While the full impact of these reforms will take time to materialize, they are intended to support potential output growth and prevent future inflationary pressures.
the government acknowledges that macroeconomic rebalancing requires “timing, sequencing, managing expectations and maintaining credibility,” and is not a pursuit of short-term popularity. While it is indeed tempting to lay blame solely at the feet of the current management, doing so overlooks both the lingering effects of past policies and the emerging signs of economic recovery.
