Annual CPI expected to peak in Q3
Broadly speaking, today’s selected prices for September support our view that annual CPI peaked in Q3 and will ease in Q4. The monthly prices were a touch on the softer side relative to our priors and set a lower base going into Q4. It provides early evidence that the current bout of inflation is slowly starting to unwind. This should help ease some concerns around inflation persistence, with RBNZ Chief Economist Conway noting yesterday it is nerve wracking with CPI close to the top of the target band.
Headwinds Continue
The services sector in New Zealand remains mired in contraction, according to the BNZ – BusinessNZ Performance of Services Index (PSI).
The PSI for September was 48.3 (A PSI reading above 50.0 indicates that the service sector is generally expanding; below 50.0 that it is declining). While this was 0.7 points higher than August, the sector has now been in ongoing contraction for 19 consecutive months. The September result was also still well below the average of 52.9 over the history of the survey.
BusinessNZ's CEO, Katherine Rich said that it was a case of a different month but the same story for the sector. For the sub-index results, Activity/Sales (47.8) and New Orders/Business (49.6) did pick up from August, but still remained in contraction. Employment (47.8) experienced increased contraction, while Stocks (50.6) was the only sub-index to show expansion during September.
The proportion of negative comments for September (58.0%) was down on August (59.6%) and July (58.5%). Negative comments received show that the services sector continues to struggle under weak economic conditions, with low consumer confidence, reduced discretionary spending, and high living costs curbing demand. Businesses report falling sales, fewer new contracts, and cautious clients delaying projects amid rising costs and ongoing uncertainty about the broader economy.
BNZ's Senior Economist Doug Steel said that "in isolation, the combined PMI/PSI activity indicator warns of economic growth struggling to gain traction".
Hovering below expansion
New Zealand’s manufacturing sector again remained just below expansion levels for September, according to the latest BNZ – BusinessNZ Performance of Manufacturing Index (PMI).
The seasonally adjusted PMI for September was 49.9 (a PMI reading above 50.0 indicates that manufacturing is generally expanding; below 50.0 that it is declining). This was exactly the same result as August but below the average of 52.4 since the survey began.
BusinessNZ’s Director of Advocacy, Catherine Beard, said that while it was good to see the September result not showing increased contraction from August, the sector remains agonizingly close to returning to expansion mode.
"Despite the sector remaining in technical contraction, four of the five main sub-index values were in expansion during September. This was led by deliveries of Raw Materials (51.1), followed by Finished Stocks (50.4) and New Orders (50.3). Production (50.1) managed to keep its head above water, but Employment (47.5) was the primary reason for the September PMI result not being able to advance to expansion".
The proportion of negative comments from respondents stood at 60.2% in September, compared with 58.1% in August and 58.6% in July.
Manufacturers continue to report soft demand, with many noting lower order volumes, cautious customer spending, and ongoing uncertainty across domestic and export markets. Rising costs, weak confidence, and competitive pressures are squeezing margins, leaving many manufacturers in a holding pattern as they wait for clearer signs of recovery.
BNZ’s Senior Economist Doug Steel said that "the lack of improvement in the PMI risks a slower recovery than we have penciled in. Improvement is needed to be consistent with the pace of growth we forecast for the second half of this year".
RBNZ cuts OCR to 2.50%
For more than a year we have been forecasting the Official Cash Rate (OCR) to go below 3% by the end of 2025. It now is, with the RBNZ cutting the OCR by 50bps to 2.50% today.
QSBO supports lower rates, mixed signals on how far
For those that are inclined to think the economy needs the RBNZ to lower rates, the QSBO does not stand in the way of that view. But on the extent of the reduction required, there were mixed messages. It doesn’t make the RBNZ’s decision tomorrow easy.
Optimistic business outlook
Businesses remain firmly optimistic and have positive expectations for activity, according to the latest ANZ Business Outlook survey. Firm’s own activity expectations for 12-months ahead increased from 38.7 to 43.4 in September, with lifts broad based across all sectors. Based on historical relationships, this would imply annual economic growth a touch over 3%. That is consistent with our forecasts for the next 12 months. It is reassuring to see more evidence of businesses expecting recovery.
Job ads slowly starting to turn?
Job ads are starting to show some tentative signs of life, albeit from a very weak base. The latest 3-months (Jun – Aug) show a 1.9% lift in the number of ads relative to the previous 3-months (Mar – May). They also nudged back above year-earlier levels for the first time since late 2022.
NZ Underperformance Highlighted
We have long touted that GDP contracted in the second quarter of 2025. And going into today’s release we were the most pessimistic of local forecasters. But even we were surprised by the magnitude of the printed 0.9% decline for Q2.
Out of the worry zone
A sharp narrowing in the annual current account deficit came as no surprise today, but the extent of it sure was.
The current account deficit narrowed substantially to 3.7% of GDP in the year to June 2025. This was significantly smaller than the 4.8% of GDP that we and the market expected. The surprise was the extent of the revisions.
Less chance of inflation band breach
Selected price indexes for August were largely in line with expectations. While our Q3 CPI pick remains unchanged at 0.9% q/q and 3.0% y/y, the underlying decimals suggest there is now less chance that annual inflation goes above the 3% mark.
Services Sector Slump Persists
New Zealand’s services sector remains in an ongoing period of contraction, according to the BNZ – BusinessNZ Performance of Services Index (PSI).
The PSI for August was 47.5 (A PSI reading above 50.0 indicates that the service sector is generally expanding; below 50.0 that it is declining). This was 1.4 points lower than July, and well below the average of 52.9 over the history of the survey. The sector has now been in ongoing contraction for 18 months.
BusinessNZ's CEO, Katherine Rich said that the sector has now endured tough times for a year and a half, representing a very difficult period for many. For the sub-index results, both Activity/Sales (46.2) and New Orders/Business (47.8) slipped from July. Employment (48.3) did show a higher value than July, although still in long-term contraction.
The proportion of negative comments for August (59.6%) was up on July (58.5%) but down from June (66.2%). Service sector businesses reported widespread pressures from inflation, high interest rates, cost-of-living impacts, and weak consumer confidence, all contributing to reduced demand and spending. Other concerns included seasonal slowdowns, rising operating costs, supply chain disruptions, and government policy uncertainty.
BNZ's Senior Economist Doug Steel said that "across the economy, we still believe the general signs of a turning point are there. However, there is a very real risk any ensuing bounce takes longer than currently expected".
Struggling to move upwards
New Zealand’s manufacturing sector fell back into contraction during August, according to the latest BNZ – BusinessNZ Performance of Manufacturing Index (PMI).
The seasonally adjusted PMI for August was 49.9 (a PMI reading above 50.0 indicates that manufacturing is generally expanding; below 50.0 that it is declining). This was down 2.9 points from 52.8 in July and below the average of 52.5 since the survey began.
BusinessNZ’s Director, Advocacy Catherine Beard said that the August results suggest the sector has yet to turn the corner toward sustained growth. Although the reading was just shy of the no-change mark of 50.0, it still points to an industry struggling to regain its footing after an extended period of contraction through 2023 and 2024.
“Two of the five main sub-index values were in expansion during August. This was led by kew Orders (55.2), which encouragingly continues to trend upwards, reaching its highest level of activity since August 2022. Deliveries of Raw Materials (50.5) also remained in expansion, although down from July. In contrast, Production (46.6) fell 6.7 points from July, while Employment (49.1) and Finished Stocks (47.1) also recorded contraction.
The proportion of negative comments from respondents stood at 58.1% in August, compared with 58.6% in July and 65.5% in June. Negative comments indicated flat sales, with many customers cautious or inactive. Rising costs and global uncertainty are squeezing margins, leaving confidence low and recovery patchy.
BNZ’s Senior Economist Doug Steel said that “manufacturers are continuing to do it tough. We believe the general trend in the economy is still upwards, but indicators are often choppy around a turning point".
GDP likely lower in Q2
We have been warning of an economic contraction in Q2 for some time. Today’s data strongly support that notion.
Our estimate for Q2 GDP has been lowered to -0.5% q/q (from -0.2%) after crunching through today’s mass of manufacturing, wholesale trade, and services data.
Job ads few and far between
Labour market conditions remain soft. Indicative of this, after falling nearly 50% from their peak, job ads have wobbled around the same low level for over a year. In the three months ended July, there was a further 0.3% reduction in the number of ads relative to the previous three months.
ANZ business survey still robust
August’s ANZ Business Opinion survey continues to portend growth ahead. Yes, the own activity indicator eased from 40.6 to 38.7, but its level is still consistent with annual GDP growth around 3% on our estimates. This is well above our (and the RBNZ’s) current forecasts. We assume most of the responses were prior to the RBNZ’s dovish pivot last Wednesday.
RBNZ Doves Fly
The RBNZ is back on the warpath. Not only did it cut its cash rate 25 basis points to 3.0% but, in today’s Monetary Policy Statement, it gave a very strong indication there is even more to come. Accordingly, we are adding a further 25 point cut in November in addition to the cut we were already anticipating for October. This takes the low in the cash rate to 2.50%.
Treading water
New Zealand’s services sector continued to display contraction for a sixth consecutive month, according to the BNZ – BusinessNZ Performance of Services Index (PSI).
The PSI for July was 48.9 (A PSI reading above 50.0 indicates that the service sector is generally expanding; below 50.0 that it is declining). Although the PSI again improved from its previous month's value, it was still well below the average of 52.9 over the history of the survey.
BusinessNZ's CEO, Katherine Rich said that while the July result was a continued improvement from 44.3 posted in May, the sector has not experienced expansion for 17 consecutive months. For the sub-index results, Activity/Sales (47.5) was still unable to exhibit any expansion, while New Orders/Business (50.0) displayed no change. Stocks/Inventories (51.4) did show expansion for the second consecutive month, although Employment (47.1) remained in contraction for 20 consecutive months.
The proportion of negative comments for July (58.5%) was down from June (66.2%) and May (65.6%). Service sector businesses reported declining sales, reduced spending, and low confidence due to cost-of-living issues, inflation, high interest rates, and a slow economy. Other challenges included seasonal downturns, weather impacts, rising costs, staffing issues, and uncertainty from global conditions.
BNZ's Senior Economist Doug Steel said that "combined with recent improvement in the Performance of Manufacturing Index (PMI), electronic card transactions and ANZ’s Truckometer, there are accumulating early signs of life in the economy".
Q3 inflation still lining up 3%
The main interest in today’s July Selected Price Indexes was to see what they suggested for our thoughts on Q3 CPI and related influence on household disposable incomes.
Return to expansion
New Zealand’s manufacturing sector moved back into expansion during July, according to the latest BNZ – BusinessNZ Performance of Manufacturing Index (PMI).
The seasonally adjusted PMI for July was 52.8 (a PMI reading above 50.0 indicates that manufacturing is generally expanding; below 50.0 that it is declining). This was up from 49.2 in June and above the average of 52.5 since the survey began.
BusinessNZ’s Director, Advocacy Catherine Beard said that after a couple of challenging months for the sector, the upswing in activity for July saw a return to levels of expansion seen during the start of 2025.
“All five main sub-index values were in expansion during July. This was led by New Orders (54.2), which reached its highest level of activity since March 2022. Similarly, Production (53.6) was at its highest level since August 2022. Finished Stocks (51.8) and Deliveries of Raw Materials (51.9) recorded similar levels of expansion, while Employment (50.1) managed to get just above the no change mark after two previous months in contraction."
Despite the return to expansion, the proportion of negative comments from respondents stood at 58.6% in July. However, this was down from June (65.5%) and May (64.5%). Negative comments indicate that manufacturers report weak demand, falling orders, rising costs, inflation, and ongoing economic uncertainty, which has been worsened by tariffs, slow construction, and low consumer spending. Many cite a lack of confidence, delayed projects, and customers ordering only what is immediately needed, creating stagnant market conditions.
BNZ’s Senior Economist Doug Steel said that “given the prevailing headwinds it is, perhaps, even more encouraging that the PMI has moved back into expansion. It will need to be sustained or nudge a bit higher to be consistent with our economic forecasts, but it is good to see a move for the better".
Relative growth drives Aussie migration
Following a period of underperformance, we expect economic growth in New Zealand and Australia to soon converge.
Labour market demands further easing
Today’s labour market data were unequivocally weak. They should put the seal on an August rate cut and increase the odds of one more thereafter. But the big question on everyone’s lips is: are the data sufficiently weak that Prime Minister Luxon will feel the need to ask the Government Statistician, Mary Craig, to relinquish her post?
Business expectations hold firm
The ANZ Business Survey continues to portray a positive economic outlook. Forward-looking indicators for growth, investment and employment were little changed in July and remain firmly optimistic. This buoyancy is a far cry from current conditions and is yet to show up meaningfully in actual economic outcomes.
BNZ & SEEK Employment Report: No joy in June
The trend in job ads has resumed its downward slide, declining another 1.2% in June. Labour demand has weakened further. After a year of relative stability, ads are again on a downwards trajectory.