From the beach 2026

After two years of sluggish activity, households under pressure, and repeatedly deferred expectations of recovery, 2026 is shaping up as a pivotal year for the New Zealand economy. Although some of the drags of 2024-25 will begin to ease, domestic and global structural shifts mean the next upswing could struggle to match the strong growth recorded at times during the 2010s.

In our annual article From the Beach, we explore four major forces that will shape New Zealand’s economic prospects in the year ahead and beyond.

Despite substantial interest rate cuts throughout 2024 and 2025, household spending has remained sluggish and failed to recover to the degree that had been anticipated. Typically, lower mortgage servicing costs are a key stimulus for spending, but outcomes over the last 18 months have been different for two reasons.

Electricity, local government rates, insurance, and food have been among the fastest‑rising cost categories, and these are items that households cannot easily reduce or shift away their spending from. In terms of the effects on household spending, the composition of inflation over the last year has mattered more than the headline rate of (currently) 3.1%pa. Our Chart of the Month takes a closer look at the gap between inflation for essential and discretionary spending.

The acceleration in inflation in 2021/22 to over 7%pa (see Chart 1) remains fresh in consumers’ minds. As a result, households have been more cautious than usual, treating extra disposable income from falling mortgage rates not as fuel for spending but as an opportunity to rebuild buffers and regain a sense of financial security.

Even as labour market conditions gradually improve in 2026, consumer sentiment might only recover slowly. Businesses hoping for a rapid rebound in retail and service sector demand could continue to find expectations running ahead of reality. We have noted before the gulf between business and consumer confidence, and we expect this gap to remain problematic to a substantial pick-up in household activity.

The external environment for New Zealand has undergone a structural shift, with two particularly important long‑term implications.

From our free-trade agreement coming into force in 2008 through until 2020, China’s rapid growth generated extraordinary demand for New Zealand’s commodity exports – especially dairy, meat, and logs. But Chart 2 shows that era has ended. China is now grappling with a shrinking population, a struggling property sector, and rebalancing efforts that limit future growth.

As a result, New Zealand cannot rely on China as the primary engine of export expansion. The free-trade agreement recently secured with India stands out as one of the most meaningful opportunities to diversify and rekindle external sector momentum, although it will take time before trade with India will make a substantial contribution to New Zealand’s growth.

The shock of “Liberation Day”, and the sudden escalation of US import tariffs under President Trump, demonstrated the fragility of long‑standing global trading norms. New Zealand, as a small open economy, is especially exposed when large economies embrace protectionism.

For exporters, 2026 will be another year where navigating geopolitical uncertainty is not a risk on the margins, but a core strategic challenge. That uncertainty has ramped up again over the last few weeks with the US incursion into Venezuela and President Trump’s manoeuvring and messaging around Greenland. Although neither of these situations have any direct implications for New Zealand, they highlight the weakening of the rules-based order to international relations. A deterioration of global security conditions would have negative implications for international trade and economic activity, hurting New Zealand’s export prospects and growth potential.

New Zealand’s population patterns have historically been a major driver of both headline GDP and housing‑related economic activity, but these effects are shifting in several important ways.

The large net migration inflows of the late 2010s seem unlikely to return. Chart 3 shows Australia’s lower unemployment rate, which continues to pull New Zealanders across the Tasman, while New Zealand’s migration inflows have mostly normalised after the massive inflows in 2023. Combined with lower birth rates and slower natural population growth, the result is a structurally slower expansion in the labour supply and household formation.

Government efforts to loosen land supply constraints could gradually make the housing market less volatile and less prone to the price surges that previously fuelled consumer spending.

Given that housing affordability remains worse than at any time before 2019, a period of limited house price inflation is not unwelcome. However, it does mean households are less likely to rely on rising property values as a pathway to wealth creation or increased consumption.

These changes suggest that industries tied to construction, real estate, and household durables may need to recalibrate expectations for what “normal” levels of activity look like over the next 5-10 years.

A final constraint on the pace of recovery is the public sector. After several years of elevated spending and pressure on revenue, the government is now experiencing a prolonged period of relative fiscal tightening. In the near term, this situation means:

• weaker growth in public sector demand contributing to slower economic growth
• increased pressure to prioritise spending, as key long‑term cost drivers such as health, superannuation, and infrastructure continue to grow faster than revenue.

Beyond the immediate fiscal repair job lies a deeper national conversation: should New Zealand scale back what it expects from government, or accept higher taxes and a permanently larger state?

The current trajectory shown in Chart 4 leans more towards the latter, which could place a medium‑term cap on potential growth unless economy-wide productivity growth improves meaningfully.

A core challenge here remains around the quality of government spending. Despite government spending as a proportion of economic activity remaining larger in the second half of the 2020s than a decade earlier, concerns remain about the availability of various services. If we’re spending more but seemingly getting relatively less, it’s difficult to be sure about the right mix of the taxes and spending.

New Zealand is entering 2026 with improving momentum, but partial economic indicators to date show that this rebound is not the rapid, broad‑based one that typically follows a downturn. Some of the cyclical drags of 2024–25 will fade, but the structural issues that have emerged over the last few years – changes in the global trade environment, slower population growth, a weaker housing market, and mounting fiscal constraints – mean that the next few years could look very different from the 2010s.

The challenge for policymakers, businesses, and households alike is not simply to wait for “normal” to return, but to adjust to a new equilibrium where growth is slower, more diversified, and possibly less reliant on the engines of expansion that have dominated New Zealand’s economic fortunes since the Global Financial Crisis.