1.0 The Front Pages

Could the summer of 2024 bring some much-needed positive economic news? Recent data suggests that a glimmer of optimism is emerging, although the government’s focus on tax relief, the cost-of-living crisis, and reining in fiscal spending has been meet with mixed results. We have seen some hope with inflation stabilising, interest rates declining, and business and consumer confidence ticking up, but a high degree of uncertainty remains over the speed and trajectory of economic recovery during 2025.  

The past four quarters have been marked by slow to negative GDP growth. In the latest September 2024 quarter, production GDP fell by one percent (0.1 percent growth over the year). The goods-producing industries experienced the largest contraction over the quarter with output declining by 2.8 percent (-2.5 percent annual average). GDP in the manufacturing sector declined by 2.6 percent (-1.4 percent annual average) and the fall for construction was 2.8 percent (-4.5 percent annual average). GDP for the service industries fell by 0.5 percent compared to June 2024 (0.8 percent growth over the year).

The primary industries group was the only segment of the economy that grew over the quarter, expanding by one percent (3.2 percent annually). This was driven by the agriculture, forestry, and fishing industries which experienced a 1.4 percent growth in output. The effects of the rate cuts by the Reserve Bank, which only began in August 2024, are not reflected in these data.

Inflation back within its target range for the first time since 2021

A key storyline domestically has been inflation returning to the Reserve Bank of New Zealand’s (RBNZ) target range of 1–3 percent. Annual inflation, measured by the Consumers Price Index (CPI), fell to 2.2 percent in the September 2024 quarter, a sharp decrease from the 3.3 percent recorded in the June 2024 quarter. This was a welcome sign for the economy following a period of restrictive monetary policy.  

Tradeable inflation, which tracks the prices of goods and services that can be easily traded (such as imports or domestic goods in competition with imports), decreased by 0.2 percent from the previous quarter, for a total annual decrease of 1.6 percent. As the price of food and other retail goods stabilises, consumers may benefit from lower costs.  

Non-tradeable inflation, which measures the goods and services that cannot be easily traded (domestic inflation), remains sticky. Local authority charges, including housing rates, increased by 12.2 percent in 2024, imposing a substantial burden on households. Other non-tradeable services such as domestic airfares decreased in price by 11.2 percent.

Interest rates expected to keep falling  

The RBNZ slashed the November official cash rate (OCR) by a further 50 points to 4.25 percent, as expected, due to weakening inflation. Another 50-point reduction is expected in the next announcement in February 2025.  

The financial markets had a subdued response to the announcement, having already anticipated and priced into the market an OCR drop. The relationship between stock and the OCR is complex, and the RBNZ’s clear messaging on the potential OCR decrease prevented strong stock fluctuations in the market.  

The banking sector swiftly responded to the OCR cut by lowering mortgage rates. ANZ passed on the full saving to consumers, lowering its flexible loan rates to 7.5 percent, down from 8 percent. BNZ, Westpac, Kiwibank, and ASB all followed suit in dropping their home loan rates. Business loans will benefit from the lower interest rates, providing relief for businesses.  

Pressure on consumers persists

It will take time for the lower interest rates to impact consumers. Consumer confidence remains subdued, with people continuing to feel the pressure. The ANZ-Roy Morgan NZ Consumer Confidence Index improved by nine points in November following a dip in October. Current personal financial situation was one of the largest contributors to this increase, despite the rising unemployment. Nearly 22 percent of those surveyed expected to be better off next year – an increase of eight points. Wellington is the region with the most pessimistic consumers, likely due to public sector job cuts and related effects.

The weak economy is reflected in the labour market. As expected, the unemployment rate rose to 21,000 in September 2024 compared to the same period last year. Demand for employees continues to weaken, with the Ministry of Business, Innovation and Employment reporting that online job advertisements fell 31.4 percent over the September 2024 quarter. Job listings have decreased across all skill levels over the year to the September 2024 quarter.  

Business confidence is optimistic heading into summer

Summer typically boosts economic activity thanks to tourism and holiday spending. Business confidence in the November ANZ Business Confidence Index experienced a marginal decrease of one point, yet it remains high, indicating confidence in future economic conditions. Businesses anticipate an increase in activity, as reflected by a two-point rise in the expected own business activity index.  

Despite strong business confidence, building consents for new dwellings are down. In October 2024, new dwelling consents were down 5.2 percent, after a rise of 2.4 percent in September. Additionally, the total value of non-residential building work consented was $9.3 billion, down 3.5 percent from the year ending October 2023. The November ANZ Business Confidence Index indicators for residential and commercial construction have both decreased. Construction activity is unlikely to upswing in the short term.  

Migration continues to have interesting trends

There has been an increase in outward migration as New Zealand residents leave for other countries. In the year ending September 2024, Stats NZ’s provisional data release indicated net migration of 44,900 individuals, down from a peak of 136,380 in the year ending October 2023. The last time net migration was negative (September 2022), the country was emerging from the COVID-19 lockdowns. The current decline is likely due to a combination of economic factors, including weaker economic performance and fewer job opportunities.  

A look at the world

2024 has been dubbed the “year of elections” with over two billion people casting votes in 50 countries. One election looms large, with potential economic ramifications for New Zealand: the re-election of President Donald Trump in the United States. Throughout his presidential campaign, Trump proposed a 20 percent tariff rate for all imports into the USA.  

In the year ending September 2024, our second-largest trading partner was the USA, with exports totalling $15.8 billion. The exact ramifications of the proposed tariffs are difficult to predict, particularly without full knowledge of the severity, scope, and implementation of such tariffs. Supply chains are intertwined and complex – there will be flow-on effects even if New Zealand is not fully exposed. The rerouting of exports from countries that have higher tariffs imposed on them in the USA might provide cheaper goods in our market. At the same time, New Zealand exports to the USA might be cheaper compared to exports from countries more exposed to higher tariffs. Time will tell.  

The geopolitical outlook is very uncertain  

The current geopolitical climate is one of uncertainty, with low economic growth stifling international trade and investment. For New Zealand, the rising tension between the USA and China poses a challenge. As two of our largest trading partners vie for influence, New Zealand might be caught in the crossfire. As we navigate this uncertain landscape, our future trade relationships will be impacted by geopolitical uncertainty.  

2.0 Special feature: Operation Haircut - Trimming the cost of compliance for small business

No matter which sector you look at, 2024 has been a tough year for business. The latest Centrix data insights reveal company liquidations are up 27 percent year-on-year, a trend which is expected to continue into 2025. Many of those will be in the small- to medium-sized category.  

Small- to medium-sized businesses (SMEs) make up the backbone of New Zealand’s economy. There are more than 540,000 small businesses operating (i.e., firms with fewer than 10 employees) – that’s 97 percent of all firms in the country. It could be argued, in a New Zealand context at least, that there is big business in being a small business.

Given their position and role within our economy, you might expect SMEs enjoy a more considered (not more privileged) status on the compliance side of doing business. But the reality is that small businesses shoulder a heavy load of compliance and regulatory obligations proportionate to larger firms in New Zealand. Everything from health and safety to anti-money laundering declarations – the hoops small businesses must jump through can at times seem endless.

A nominal fee here, another registration or requirement there. On their own, the charges are usually reasonable. But the frustration for SMEs is that all these minor duties can quickly start piling up, to the point that it becomes too much to stomach.

It’s not just the monetary aspect of compliance that keeps small businesses from getting on with it – the time and effort required to fulfil regulatory obligations is just as taxing for firms with few people on their payroll. In today's dynamic business environment, there is a substantial administrative burden in adhering to various requirements.  

According to the BusinessNZ Network, an estimated 10–15 percent of a full-time employee’s time is spent on compliance matters, and the administrative load on SMEs is growing.

As one example, let’s take a closer look at New Zealand's hair and beauty industry, which is worth approximately $1.4 billion annually. Despite being an industry which needs to stay up to date with the latest trends to survive and turn a profit, regulations governing hairdressing date back as far as the 1950s. Under these rules (which would have been established when Sir Keith Holyoake was prime minister), hairdressers face costly and outdated compliance requirements. Sir Keith, by the way, left parliament before many of today’s hairdressers were born.

Even if you’re a sole trader, regulations that hairdressers must still abide by today include submitting professionally drawn plans (often costing upwards of $10,000) to meet regulation that requires multiple basins. It’s a triviality which, in reality, is costing these businesses thousands of dollars.

Outdated regulations like these aren't just historical quirks of industry – they’re serious barriers to efficiency and growth. They can be the tipping point for businesses already under immense financial pressure. For an industry like hairdressing, where profit margins are slim, unnecessary compliance costs can mean the difference between survival and closure. BusinessNZ has called time on unnecessary compliance costs across all sectors of our economy. It’s a call to action for policymakers to reduce the compliance burden and let small businesses thrive.

Regulations past their use-by date

“This isn’t about cutting corners, it’s about cutting waste,” says BusinessNZ economist Stephen Summers.  

“An industry worth more than a billion dollars needs to be free to focus on serving clients, not bogged down with excessive paperwork in the backrooms.  

"Updating 70-year-old regulations, as is the case for hairdressers, could save time and money, energising an industry that affects all communities in New Zealand."

So where is the regulator in all of this? The government has taken interest in the compliance cost pain points for small business, along with ways they can be reduced.

The broader compliance landscape

That’s why earlier this year the BusinessNZ Network (including the Employers and Manufacturers Association, Business Central, Business Canterbury, and Business South) partnered with government departments to host a series of five roundtable meetings across the country (Dunedin, Christchurch, Auckland, Hamilton, and Wellington) to bring policymakers and small businesses from a range of sectors together.  

More than 80 New Zealand businesses took part, including manufacturers, retailers, hospitality, business services, and not-for-profits. Government representatives from the Ministry of Business, Innovation and Employment (MBIE), the Inland Revenue Department (IRD), and the Ministry for Regulation were present at these roundtables to hear where exactly these pain points were for SMEs, and to discuss effective solutions together.

Hairdressers aren’t alone in the compliance cost fight. The small businesses represented at these roundtables were invited to share their experience about government compliance, in particular where this was costly (both directly, and through creating opportunity costs), time-consuming, created uncertainty, or generally limited options for their business operations. The conversations at these meetings were honest and wide-ranging. It was important that the government heard the truth – especially through a small business lens – to better understand how the issues raised could be addressed to reduce small businesses’ compliance and administrative burdens.  

The small businesses that attended noted their good experiences with government and made it clear they generally agree with the intent of government regulation. Most of their feedback was not an objection to regulation in principle but rather complaints about aspects of operational practice or regulatory design.

Some common pain points emerged from across the small business landscape. They spanned several key areas of business: health and safety regulation, immigration compliance, employment agreements, anti-money laundering obligations, tax, food safety, and more.    

1. Ambiguity and uncertainty: Small businesses often face confusion when dealing with complex or frequently changing regulations. Without the internal resources to efficiently meet these demands, many turn to external consultants, adding to their costs and creating a reliance on inconsistent third-party advice.
2. Disproportionate compliance burdens: Regulations are often designed without considering the scale or risk profile of the business. As a result, smaller businesses feel overregulated, especially when rules fail to adjust for their size or low-risk activities.
3. Regulations that aren’t fit for purpose: Many small businesses question whether specific compliance requirements are necessary or effective for their industry. In some cases, they note that New Zealand’s rules are tougher than international standards.
4. Inconsistent government interactions: Businesses report variable experiences with government agencies, citing slow response times, unclear guidance, and conflicting advice, all of which hinder their ability to meet compliance requirements.
5. Outdated and inefficient processes: The continued use of outdated communication methods and duplication of information slows down administrative processes, creating inefficiencies for businesses already under strain. 
6. Rigid, prescriptive rules: Existing regulations can stifle innovation, preventing firms’ adaptation to new technologies or evolving business practices.  

While these discussions highlighted significant frustrations, the roundtables were focused on identifying solutions. BusinessNZ and participating SMEs proposed several key improvements:

1. Enhanced use of technology: Government departments should consistently adopt modern technologies to streamline communication and regulatory processes, making it easier for businesses to comply.
2. A centralised resource for SMEs: Business owners called for better promotion and development of business.govt.nz as a comprehensive, user-friendly resource for navigating compliance requirements.
3. Scaled and tailored compliance: Regulations should be applied proportionally to the size and risk level of businesses, with flexibility for managing low-risk issues. Graduated approaches would reduce unnecessary burdens for smaller enterprises.
4. Improved government engagement: Businesses emphasised the need for consistent customer service, timely and accurate information, and a more collaborative approach to compliance support. They want to feel like valued customers, not just rule-followers.
5. Regulatory clarity and stability: Simplified rules and alignment with actual risks could reduce uncertainty. Participants also urged the government to combine redundant processes and avoid unnecessary rule changes that disrupt operations.

Solutions in sight

So, what can be done about the issues brought forward? Rather than simply diagnose the problems, the roundtables resulted in a shopping list of reforms for the government to action. 

Items include centralising data services to reduce duplication, introducing tiered compliance systems that match the size and risk of the business, and modernising sector-specific rules – including those for hairdressers.

"A small business-friendly compliance system is not a luxury – it’s an economic must for New Zealand,” says Stephen Summers from BusinessNZ.

“We had great buy-in from government departments, and there is a desire to iron out the compliance process – to get out of the way of good business, while still making sure SMEs’ obligations are met.  

BusinessNZ will be keeping an eye on the list of fixes the government can act on now, to make it easier to do business.”

The message is clear: reducing compliance costs isn’t about dodging responsibility. It’s about creating a fairer, more efficient system that lets small businesses focus on what they do best. With a set of actionable reforms on the table, it’s now up to policymakers to deliver.

BusinessNZ’s report Reducing compliance burden on New Zealand small businesses is available to read on their website. 

3.0 BERL economic forecasts  

Economic growth has been slow to negative for some time in New Zealand. We expect lower interest rates to encourage an upswing in economic activity, but not until early to mid-2025. Annual GDP growth will remain subdued over the near term. We forecast GDP to grow by to 0.2 percent in the June 2025 year. Over the second half of 2025 and early 2026, the OCR cuts will have started to flow through to some of the more sensitive sectors such as construction and manufacturing. However, we have revised our forecasts downwards to one percent in the June 2026 year, and 2.4 percent in the June 2027 year. However, there is still a significant amount of uncertainty over the trajectory of economic recovery and much remains to be seen.

The CPI has fallen within the RBNZ’s target range of 1–3 percent faster than anticipated. In the year to September 2024, headline inflation was 2.2 percent, falling from 3.3 percent in the June 2024 year. However, non-tradeable inflation remains a pressure point at the 4.9 percent mark, with rates and insurance particular culprits in this regard. We forecast the CPI falling to 1.8 percent in the June 2025 year before striking a more neutral balance. The RBNZ is likely to continue to cut interest rates in response to lower inflation.

Restrictive monetary policy has done its part in restricting business investment and activity. In response, businesses have held off on hiring new staff and have reduced capacity. FTE employment growth has been in the red for the past four quarters and we expect this trend to continue in 2025. The number of people on main benefits has also been increasing, up 8 percent in the September 2024 year. Although business confidence has been improving, and we see a slight upswing in economic activity in the new year, this will not be enough to balance out the ongoing public sector job cuts, as well as private sector cuts and closures. As anticipated, the unemployment rate continued to increase, reaching 4.8 percent in September 2024. The labour force has also been shrinking, with some working-age people leaving the workforce entirely. We see unemployment peaking in 2025. Once the impacts of lower interest rates flow through to the labour market as businesses start adding new capacity, unemployment will start to decrease again in 2026 and 2027.

Net migration has recently been tailing off significantly, and there is seemingly a clear convergence in the number of arrivals and departures. Annual net migration for the September 2024 year fell to 44,900, with the number of arrivals down 23 percent and the number of departures up 35 percent. With limited job growth and rising unemployment, more Kiwis are expected to leave, but the peak in the number of people departing is likely to have passed. We envisage net migration of around 35,000 in 2025. As economic conditions improve, net migration will inch towards the long-term average of around 50,000 people in the years that follow.  

Multiple advanced economies, including key New Zealand trading partners, have seen improved conditions over the past year, stimulating export growth. Total exports in the year to September 2024 increased 2.9 percent, with goods exports the main driver. However, significant uncertainty looms on the horizon and potential trade implications for New Zealand remain unclear. Short-term export growth is expected to be subdued.  

Import growth has been sluggish, with consumers’ wallets under pressure. In the year to September 2024, total imports were stagnant, with a fall in goods imports of 2.6 percent balanced against a rise in services imports of 6.9 percent. More money flowing through the economy in the new year will add to import growth, but it is likely more of this will be captured post-June 2025. We expect import growth to be low at 1.6 percent in June 2025. As countries reroute their exports in a changing landscape, we can see cheaper goods becoming available and import growth improving in 2026 and 2027.  

Actual OBEGAL results have come in higher than previous forecasts. For the four months ended October 2024, the OBEGAL deficit was larger by $0.9 billion than forecasted. Weak economic conditions have resulted in lower tax take and higher welfare expenses. As more people leave employment, we anticipate the deficit widening more in 2025.  

All percentage growth rates are annual. Years are to June.

We have simplified the contents of our forecast data tables to focus on a selection of key variables. If you would like to obtain forecasts of other variables not shown, please email info@berl.co.nz or phone 04 931 9200.