Pick A Path: ‘Alive In 25’ Or ‘Thrive In 25’. Here’s Our Outlook For 2025 And Beyond

• From thoughts of rate hikes to delivered rate cuts, it’s been a topsy turvy year. But we’re putting 2024 behind us and looking to 2025. It should be a better year. Especially the second half of the year.
• The RBNZ’s laser focus on inflation should broaden out, with the inflation beast tamed at 2%. And with more interest rate cuts on the way, we see the economy recovering from recession in 2025. Along with gains in the housing market.
• It’s a confidence game. It’s all about confidence. And we expect the lift in confidence to persist, and eventually feed into activity, profitability, hiring and investment. We’re more confident in the recovery.

We are privileged to meet many of Kiwibank’s business banking clients. And the anecdotes and insights we gain are invaluable. Early in the (2024) year, one client summed up the feeling among businesses perfectly: “We must survive until 25”. And although we delivered an optimistic outlook, stating that interest rates would fall and we will recover in 2025, there was resistance. We often heard, “thanks for the optimistic view, miles out, but here's what we’re facing now…” and we’d hear a list of problems from rising costs, deteriorating profitability (too many firms were losing money), to evaporating order books. We were in a long and painful recession. We still are, technically. But we’re putting a stake in the ground, now, arguing the 2-year recession is over. It won’t be a V-shaped recovery, but it will be a recovery. Business owners have lifted their heads. Because talk of rate cuts became reality. They’re tangible.

So pick a path. Many businesses, still struggling, will consider themselves lucky (although luck has little to do with it) to be ‘alive in 25’. But there is a growing chorus of business owners looking to ‘thrive in 25’. Costs are becoming more manageable for many (not all), profitability is improving as a result, and expectations of growth are lifting. If we were to describe the economy in one year’s time we’d (like to) say: the economy has grown about 2%, inflation is a touch below 2%, house prices are up 6%, the unemployment rate has fallen from its 5.3% peak, and investment is picking up into 2026. So yeah, we’re recovering, and 2026 will be a better year. Just as 2025 was a better year than 2024.

It's the cutting of the cash rate that’s critical to the cultivated climb out of recession.

There’s some beautiful symmetry to our rates outlook. We’ve seen 125bps of easing thus far, and we forecast another 125bps to come. A cash rate of 3% is our forecast terminal rate, where policy settings are neither stimulating nor restraining growth. The continued cutting cycle is justified by a stabilisation in inflation around 2%. Although we see greater risks to the downside, that necessitates further policy easing. Indeed, we forecast a decline in home grown inflation. Wage growth too is moving south as the labour market loosens.

As interest rates fall, growth will gain momentum. Business and consumer confidence are improving with the rate cuts delivered and expected. Activity should lift from here. We forecast the economy growing 2.2% by the end of 2025, up from flat growth in 2024. In 2026 and beyond, the economy returns to more normal levels of growth of about 2.6% per annum. The labour market, however, is expected to deteriorate further. Labour demand lags the broader economic cycle. The unemployment rate is expected to continue climbing to a peak of 5.3% in the middle of 2025. From there, it is a slow descent as the economy recovers.

2025 will be a year of two halves. The first half will be a bumpy ride with glimpses of growth. And the second half will see an uplift in activity that will spring to life into 2026.

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