Economy grows, slowly
Whatever today’s Q4 GDP growth turned out to be it was always going to come with a proviso that it was a different world late last year compared to what we are now living in. Historical data are of much less importance compared to the news flow from the Middle East.
Deficit begins to widen again
Today’s Balance of Payments data was always going to take a backseat relative to the conflict in the Middle East. The current account deficit widened to 3.7% of GDP in the year to December 2025, slightly larger than the 3.5% deficit recorded in the year to September. It draws to an end the material narrowing trend in the current account deficit over the past three years.
Annual inflation to approach 4.0%
We were waiting for today’s selected price indexes in case there were any major surprises in the data that might derail the set of inflation forecasts that we were about to publish. As it turns out there were a couple of things that caused us to adjust our view but, in the end, they did little to change the bigger picture which is being driven by rising oil prices.
Back to Contraction
The services sector in New Zealand fell back into contraction during February, according to the BNZ – BusinessNZ Performance of Services Index (PSI).
The PSI for February was 48.0 (A PSI reading above 50.0 indicates that the service sector is generally expanding; below 50.0 that it is declining). This was 2.7 points lower than January and below the average of 52.8 over the history of the survey.
BusinessNZ's CEO, Katherine Rich said that the sector's rebound into expansion only lasted two months, with a February result similar to levels of contraction seen towards the end of 2025. All main sub-index results were in contraction, with Stocks/Inventories (46.7) displaying the largest level of contraction, followed by Employment (47.2)
The proportion of negative comments for February was 56.4%, which was down from January (58.7%) but up from December (50.4%). Negative comments received outlined weak economic conditions, high living costs, inflation and interest rates as reducing consumer spending and demand for services. Seasonal holiday effects, low confidence, staffing constraints, rising costs and broader uncertainty also contributed to softer activity.
BNZ's Senior Economist Doug Steel said that "alas, today’s PSI suggests the economy is recovering at a slower pace than we might have expected. The PSI comes as a real disappointment given that Friday’s Performance of Manufacturing Index (PMI) was relatively upbeat".
NZ recovery under the pump
Let’s get this straight, based on current information the world is not going to end. Fuels are expensive and are getting more so. Supply is heavily restricted. But demand will fall and alternative supplies will rise. And then, one day, the Strait of Hormuz will reopen. The problem is that this takes time. So, in the interim it is imperative that businesses, households and governments alike prepare for the worst while hoping for the best knowing that no matter what, a significant adjustment process is under way.
Consistent Performer
New Zealand’s manufacturing sector showed a consistent level of expansion during February, according to the latest BNZ – BusinessNZ Performance of Manufacturing Index (PMI).
The seasonally adjusted PMI for February was 55.0 (a PMI reading above 50.0 indicates that manufacturing is generally expanding; below 50.0 that it is declining). This was almost identical to the January result of 55.1, and above the average of 52.5 since the survey began.
BusinessNZ’s Director of Advocacy, Catherine Beard, said the February result marked the first time since mid-2021 that activity had recorded three consecutive months at 55.0 or higher.
"All five sub-index values were again in expansion during February. This was led by the two key indices of New Orders (57.6) and Production (56.7), followed by Deliveries (51.0). Employment (50.4) dipped from January, but still remained in slight expansion.
The proportion of positive comments from respondents stood at 55.5% in February, up from 47.7% in January but down from 57.1% in December. Manufacturers reported more orders, enquiries, and sales, supported by stronger export demand and improving conditions in certain sectors. Some also noted a growing pipeline of work and a gradual improvement in business confidence.
BNZ’s Senior Economist Doug Steel said that "recent economic data have taken a backseat relative to the conflict in Middle East. While it is too early for the PMI to capture any of these impacts, the February outturn well above the breakeven 50 mark is a useful starting point".
Q4, 2025 GDP preview
We have been increasingly wary of the fragility of the economy’s recovery. Acknowledging recent events in the Middle East, we focus here on what next Thursday’s Q4 GDP figures may show. On that, our wariness was further heightened after last week’s disappointingly weak building work put in place figures.
New Zealand at a Glance
Not that long ago the big question was could New Zealand gain economic momentum in 2026? Nearly every indicator that we currently look at provides confirmation that the recovery is underway. Moreover, there is every reason to assume it can be sustained. The bigger question now is how fast it can grow before current spare capacity is eroded and inflationary pressures climb enough that a tightening cycle is kicked off. We think there’s water to go under the bridge for a few months yet but by year’s end rates will be on a clear uptrend.
BNZ & SEEK Employment Report: Bending upwards
Job ads continued to trend higher in January. Combined with the upward revision to December, it is encouraging to see consecutive months of improvement in the number of roles advertised on SEEK. Total ads for the last three months (Nov – Jan) are up 4.4% on the previous three months (Aug- Oct).
RBNZ Holds, Plays Straight Bat
We thought the RBNZ would hold its cash rate at 2.25% today, remove the previously projected possibility of easing further, and take a cautious approach to projected rate hikes down the track, but still modestly strengthen that outlook. That is exactly what the Bank delivered today.
Annual inflation to ease, but how fast?
Selected prices for January were close to our expectations on net. Being the first month of the quarter, they provide our first clear insight into Q1 CPI. Working through the unders and the overs, there was nothing in today’s data to alter our +0.5% q/q and +2.7% y/y pick for Q1 CPI. They support our view that headline annual inflation will ease in Q1 following the lift to 3.1% in Q4.
Momentum maintained
The services sector in New Zealand remained in expansion for the first month of 2026, according to the BNZ – BusinessNZ Performance of Services Index (PSI). The PSI for January was 50.9 (A PSI reading above 50.0 indicates that the service sector is generally expanding; below 50.0 that it is declining). This was 0.8 points lower than December and below the average of 52.8 over the history of the survey.
BusinessNZ's CEO, Katherine Rich said that despite the January result showing a lower level of activity than December, at least the sector remains on the right side of the ledger after such a lengthy period of contraction. Two of the five sub-index values were in expansion for January, with Activity/Sales (54.2) leading the way, followed by New Orders/Business (51.8). Stocks/Inventories (49.7) fell back into contraction, while Employment (49.1) dropped further compared to December.
The proportion of negative comments for January was 58.7%, which was up from December (50.4%) and November (52.9%). Negative comments received showed the services sector still reporting low confidence, with Christmas–New Year holidays and seasonal shutdowns leading to fewer enquiries and a prolonged post-holiday slowdown. These effects were compounded by high living and operating costs.
BNZ's Senior Economist Doug Steel said that "the big question to end 2025 was whether the economy may be turning. Data since then has given us confidence that recent positive momentum can be sustained. The economy is growing".
Healthy expansion continues
January's activity for New Zealand’s manufacturing sector again showed a healthy level of expansion, according to the latest BNZ – BusinessNZ Performance of Manufacturing Index (PMI).
The seasonally adjusted PMI for January was 55.2 (a PMI reading above 50.0 indicates that manufacturing is generally expanding; below 50.0 that it is declining). Although this was 0.9 points lower than December, it was still above the average of 52.5 since the survey began.
BusinessNZ’s Director of Advocacy, Catherine Beard, said that the January result starts the year in the right direction after a lacklustre 2025.
"All five sub-index values were again in expansion during January. This was led by the two key indices of production (56.6) and New Orders (56.4), followed by Deliveries (53.3). Employment (52.9) recorded its third straight monthly expansion, which had last occurred in the first few months of 2025.
Despite the PMI remaining in expansion during January, the proportion of positive comments from respondents stood at 47.7% for January, down from 57.1% in December and 54.4% in November. A number of manufacturers reported weak demand, citing Christmas and summer holiday shutdowns disrupting production, skewing orders, and extending the seasonal shutdown into the new year.
BNZ’s Senior Economist Doug Steel said that "the January PMI provides further evidence that the economy has finally turned the corner. It is consistent with our forecasts and a breadth of indicators suggesting decent economic growth".
Labour market lags economic cycle
The themes of today’s mass of labour market data were much as we outlined in our preview. First, it is too early to see major changes in the labour market as it tends to lag the economic cycle. Second, there are more signs of improvement in the details. Within a decimal point or two the headline figures broadly confirmed our priors.
Inflation worryingly high
The chances of a 2026 rate hike rose significantly today with annual CPI inflation rising to an eighteen month high of 3.1%. We think our new laser-focussed-on-inflation RBNZ Governor will not be amused.
Lull in the upswing?
The upswing in SEEK job ads saw a hint of stalling into the end of 2025. After 13 consecutive monthly gains on a trend basis, job ads eased 0.3% in December. This unwound November’s gain. Latest trend estimates can get revised, so interpretation requires some caution. But the hint of a flattening trend at a still relatively low level is important to monitor. If it were to continue, it would raise downside risks to forecasts of employment growth ahead.
Expansion
The services sector in New Zealand experienced expansion for the first time since February 2024, according to the BNZ – BusinessNZ Performance of Services Index (PSI).
The PSI for December was 51.5 (A PSI reading above 50.0 indicates that the service sector is generally expanding; below 50.0 that it is declining). This was 4.3 points higher than November, but still below the average of 52.8 over the history of the survey.
BusinessNZ's CEO, Katherine Rich said that the December result ended the longest run of contraction for the sector since the survey began, stretching to 21 months. Three of the five sub-index values were in expansion, with kew Orders/Business (52.5) leading the way after four months of consecutive contraction. This was followed by Activity/Sales (52.2) and Stocks/Inventories (51.9). Despite the return to overall expansion, Employment (49.6) still remained in slight contraction.
The proportion of negative comments for December stood at 50.4%, but this was still below November (52.9%) and October (54.1%). Negative comments received showed the services sector constrained by weak demand and confidence, high living and operating costs and Christmas-related shutdowns. On the flip side, positive comments saw the services sector supported by seasonal Christmas and summer demand, improving consumer confidence driven by lower interest rates, stronger tourism, new contracts and bookings, and early signs of broader economic recovery and investment activity.
BNZ's Senior Economist Doug Steel said that "the PSI is not strong, but the positive direction of travel is important to acknowledge. Especially when the PSI is joined with the large jump in last week’s PMI, the combined index (PCI) signals firmly positive GDP growth into the end of 2025 and establishes forward momentum heading into the New Year".
Another quarter of 3% annual inflation?
A couple of the headlines from today’s selected prices looked benign enough on the inflation front, but they were more than offset by chunky gains in some of the details. The key takeaway is that today’s figures support our view that next Friday’s Q4 CPI is likely to print above the RBNZ’s November MPS forecasts.
Manufacturing ends year on high
December's activity for New Zealand’s manufacturing sector showed its highest level of activity since December 2021, according to the latest BNZ –BusinessNZ Performance of Manufacturing Index (PMI).
The seasonally adjusted PMI for December was 56.1 (a PMI reading above 50.0 indicates that manufacturing is generally expanding; below 50.0 that it is declining). This was 4.4 points higher than November, and above the average of 52.5 since the survey began.
BusinessNZ’s Director of Advocacy, Catherine Beard, said that the December result was a very welcome way to end the year, with 8 of the 12 months showing some level of expansion.
"All five sub-index values were in expansion during December. This was led by kew Orders (59.8), which was at its highest level of activity since July 2021. Production (57.4) also showed a significant lift in activity, while Employment (53.8) continued to recover after a number of months exhibiting declines during 2025.
The proportion of positive comments from respondents stood at 57.1% for December, which was up from 54.4% for November and 45.9% in October. Manufacturers saw improved activity, mainly due to seasonal Christmas demand, which lifted domestic sales, orders, and short-term workloads. This was supported by firmer business and consumer confidence, increased export and forward orders, and some gains from new customers, products, and infrastructure-related work.
BNZ’s Senior Economist Doug Steel said that "the PMI is positive for Q4 GDP calculations and points to good momentum heading into the New Year. At face value, it suggests upside risk to the positive view we already have for manufacturing and near-term GDP growth forecasts".
QSBO Indicates Strengthening Economy
We are moderately, and happily, surprised by the strength revealed in NZIER’s December Quarterly Survey of Business Opinion. At face value it shows that momentum in New Zealand’s economic recovery is gaining a real head of steam and, accompanying that, inflationary pressures are already building in a meaningful way.