Our take on the latest Gross domestic product (Thu 20 Mar 2025)
0.7% economic growth in the Dec 2024 quarter
Services exports up 8.2% thanks to tourism recovery
Household spending up just 0.1% from September
The key numbers...
- Economic growth came in at the top end of market expectations in the December 2024 quarter, with a quarterly increase of 0.7% in GDP representing the biggest lift in 18 months (seasonally adjusted).
- The most significant positive contributor to the economy’s bounce back last quarter came from the tourism sector, which was evident across several indicators. An 8.2% lift in services exports was entirely responsible for the best export result in 18 months, and non-resident expenditure in New Zealand surged 10% over the quarter. Quarterly increases of 5.3% in accommodation and food services, 2.4% in transport, postal, and warehousing, and 5.6% in arts and recreation services also demonstrated the effect of recovering international tourism on parts of the economy (all figures seasonally adjusted).
- The 0.1% quarterly increase in investment spending might not have been a large one, but it was still the first lift since June 2023. The rise was due to a 1.1% increase in private sector investment, with sizable lifts in plant, machinery, and equipment, intangible assets, and transport equipment (all figures seasonally adjusted).
- Construction remains under considerable pressure, recording its lowest level of activity for any quarter since 2018 (excluding lockdowns). Year-end growth in residential activity has fallen to -10%pa, representing the biggest fall since 2009, and the emerging decline in non-residential activity is likely to accelerate further throughout 2025. Other construction (mostly infrastructure) is performing positively, but even there, year-end growth of 2.8%pa is the slowest in seven quarters.
- After a 2.1% contraction in government consumption in the September quarter, activity rebounded 1.9% in the December quarter due to a lift in central government spending (seasonally adjusted).
- Electricity, gas, water, and waste services rebounded 2.1% following the electricity crisis in the September 2024 quarter. However, manufacturing activity failed to follow suit, rising by just 0.3% overall, with a 3.2% lift in food and beverage manufacturing barely offsetting falls in other areas of manufacturing, including chemical, polymer, and rubber product manufacturing and metal product manufacturing (all seasonally adjusted).
Components of expenditure GDP
Quarterly % changes
...and our reaction
- Although the December quarter result is welcome news following the deep recession during mid-2024, activity is patchy, and the economy is clearly still in the early stages of recovery. The reliance on tourism indicates that the pick-up is not broad-based yet, and the rebound in government spending growth is not sustainable given the budget constraints still being faced by the government.
- Nevertheless, the stabilisation in business investment, outside of construction, is encouraging. The turnaround corresponds with the sharp rise in business confidence and investment intentions during the second half of 2024, and it indicates that firms are gradually preparing themselves for an expected upturn in demand conditions this year.
- Putting aside tourism, consumer spending was disappointingly weak in the December quarter, up by just 0.1% from both the previous quarter (seasonally adjusted) and a year earlier. There were small pockets of spending growth, most notably for household contents and services, and clothing and footwear, but the overall figures suggest households will need to enjoy more interest rate relief before there is a larger and more sustained increase in spending activity.
- We expect GDP growth to remain patchy throughout the first half of this year, with further contractions in construction and central government spending likely to limit the economy’s momentum. However, higher export revenues and lower mortgage rates should boost economic growth further in the second half of 2025.
- The Reserve Bank remains on course to implement further interest rate cuts at coming meetings, and we expect the official cash rate to be down at 3% in the September 2025 quarter.
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