Interest rates have risen markedly, and growth is expected to be slow in 2024, before picking up in 2025. Monetary policy will need to remain restrictive coupled with further fiscal consolidation to help curb inflation and restore fiscal space.

Economic growth has stalled, despite high population growth. As a result GDP per capita has fallen. Inflation is declining. After a strong domestic demand-led recovery from the pandemic, the economy slowed, with higher interest rates weighing on housing construction, and inflation undermining purchasing power and consumption. Weak growth has helped to reduce inflation, with a rising unemployment rate and declining vacancies.

Imbalances are unwinding. Rapid domestic demand growth and a shut-off in inbound tourism increased the current account deficit sharply to one of the highest in the OECD. With slower GDP and imports growth plus an increase in tourist arrivals, the current account deficit is shrinking. However, it remains high and in part structural due to the high fiscal deficit.

Growth is projected to be slow in 2024, before picking up in 2025, but risks originating offshore are high (Table 1). High net inward migration can be expected to continue to contribute to growth (Figure 1). Disinflation will restore modest real income growth and support consumption and GDP growth in 2025. Beyond uncertainty related to how fast inflation will decline and when interest rates can fall, offshore risks, including an extended slowdown in China and wars in Europe and the Middle East overshadow the outlook.

Monetary policy has been tightened significantly since late 2021. This has led to a marked increase in financing costs and has slowed economic activity and inflation, but inflation is likely to be persistent. Unemployment remains low while high net inwards migration is pushing domestic demand higher than the RBNZ anticipated. Monetary policy needs to remain data dependent: when inflation will reach the central bank’s target range is uncertain and there is a risk of further negative global shocks.

Better control of government spending is needed to keep fiscal consolidation on track. The pandemic and spending overruns led to a permanent increase in the government spending to GDP ratio, resulting in a substantial deterioration of New Zealand’s fiscal position. The government should set operating allowances and tax policies that will gradually reduce the fiscal deficit to reach budget balance. This would better align fiscal policy with monetary policy efforts to restrain inflation, strengthen public debt sustainability, and restore fiscal space to finance ageing-related expenditures and the green transition.

Productivity growth is key to sustain living standards in a context of population ageing.

Like elsewhere, productivity has slowed in New Zealand since the 2008 Global Financial Crisis and labour productivity remains weak compared to other OECD countries (Table 2).

Insufficient competition is an important factor underpinning low productivity, with the limited number of competitors in New Zealand’s small market leading to market concentration. As a result, large firms in New Zealand often face weaker pressures to innovate, seek efficiencies, and provide better services and lower prices to consumers. While markups and profitability are generally high, some sectors have recorded particularly sizeable profits recently.

Ensuring competition policy is in line with best international practices is important for offsetting these handicaps. Efforts have been made to improve competition in New Zealand in recent years. Through market studies of the Commerce Commission and other inquiries, the role of anti-competitive factors has been better understood and partly addressed by new legislation and business codes. Some impediments to competition in network industries have been removed as well.

Yet, more can and should be done to further improve competition outcomes. In some sectors, market concentration can be so high that regulation will not suffice to improve competition enough, and structural solutions such as break-ups, although as a measure of last resort, could be warranted. New Zealand would also benefit from adapting its competition regulations to the new challenges of market power in digital markets.

While overall the regulatory landscape is business-friendly, entry by domestic and foreign firms could be eased. Among other reforms, SME access to public procurement contracts can be further facilitated and the FDI regime, which is still one of the most restrictive in the OECD, should be eased.

Achievement in school education is declining. The OECD PISA and other international and domestic tests consistently show that results have fallen markedly (Figure 2). Inequality remains high and attendance has dropped. There is an urgent need to improve the curriculum, reform teacher education and strengthen support to teachers and schools to deliver better education outcomes.

Results are falling. Between 2009 and 2022, New Zealand’s average score in the OECD PISA test fell by the equivalent of approximately two years of education in mathematics, 18 months in science and one year in reading. OECD research shows aggregate productivity may fall by nearly 4% as a result.

The devolved school system has many strengths and should be retained but teachers are left unaccompanied to put policy into action and over-stretched. Only general advice on what to teach in the national curriculum and insufficient coverage of core subjects, such as mathematics and science, in initial teacher education has led to highly variable learning outcomes between and especially within schools. What is missing is a stronger web of vertical and horizontal support, which international experience shows is necessary for a devolved system to perform well.

Stronger support to school leaders and teachers and more effort to spread best practice would help schools deliver better outcomes. A national curriculum that more fully spells out knowledge requirements, revamped initial teacher training with a stronger focus on core subjects, greater regional support from the Ministry of Education and enhancing evidence-based efforts to spread best practices between schools and teachers are all needed.

Inequalities in opportunity are wide. Māori and Pasifika children account for 25% and 13% of enrolments and their learning outcomes remain far below the New Zealand and OECD averages. Lower socio-economic backgrounds, reduced teacher expectations and a weak sense of belonging contribute to these gaps. New Zealand, however, is an international leader in increasing the cultural relevance and involvement of family and community in education. Experience in New Zealand and abroad suggest this pays off in both better achievement and wellbeing.

Increasing attendance, which remains below pre-Covid levels overall and even lower for disadvantaged groups, is a pre-requisite for improving equity. This requires reducing bullying, which is high in New Zealand, and improving parent and child attitudes to attending school every day and ensuring school meets the needs of all children. Transferring close family and community involvement practices from the Māori to English medium pathways would also help improve a sense of belonging and attendance. Greater early childhood education and care participation by children from lower socio-economic backgrounds is a powerful lever to improve equity but this should be accompanied by improving the quality of the system.

Insurance cover should remain broad while incentivising investments in resilience. Reforms to land-use planning and a long-term energy strategy are needed to help New Zealand adapt to climate change. The green transition needs a more rigorous cost-benefit assessment of emission reduction options.

Climate change will bring more frequent extreme weather events to New Zealand as the early 2023 storms and cyclone demonstrated, with high losses (Figure 3). Insurance premiums may become too high for some properties or coverage may be withdrawn. The insurance market should be monitored and reformed if necessary to ensure that current high coverage against climate-related damage continues.

The planning system has not coped well with urban expansion to accommodate a rapidly growing population and climate change will add further pressure. Local government will need extra revenue to pay for more resilient infrastructure, and the planning system needs a more spatial approach and fewer legal appeal rights more in line with international norms.

Over 80% of New Zealand’s electricity generation is renewable, but its dependence on hydroelectricity makes it vulnerable to droughts that will become more frequent. Although individual projects are well planned and justified, a long-term energy strategy combining emissions reduction and energy security is needed.

The plan to reduce emissions is heavily reliant on forest offsets and their treatment in the Emissions Trading Scheme (ETS) has shortcomings. The ETS should be reviewed and reformed in a way that gives clarity to the market and takes account of the problems in offsetting emissions from long-lived gases like CO₂ using exotic forest offsets.

Agriculture accounts for 48% of New Zealand’s emissions but a lack of information and viable techniques are barriers to reducing agricultural emissions. On-farm measurement of emissions needs to be improved in preparation for introducing the pricing of agricultural emissions, while maintaining strong support for R&D of gross emissions reduction technologies.