Expectations were repeatedly raised and dashed, but 2025 ended up being another frustrating year in the desert for many New Zealanders. Surely 2026 will bring better days… right?

Congratulations to the New Zealanders who have been quietly chanting “survive 2025” for the past two years. You’re almost there! Merry Christmas.

But, here’s the bad news: the economic recovery has been rescheduled to 2026.

This shouldn’t be a big surprise. In December 2024, Kiwibank economists described what they thought the economy would look like 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,” they wrote.

It was a rosy portrait of the future, painted from the depths of recession, but it matched what other forecasters predicted. The Reserve Bank picked 2.3% growth, 2.4% inflation, 7% house prices, and unemployment trending below 4.8%.

But Kiwibank also warned it wouldn’t happen smoothly: “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.”

Taken together, their predictions weren’t all wrong. Growth is likely to fall just short of 2% and investment is picking up. But house prices have flatlined, inflation is near 3%, and unemployment remains at 5.3%.

In truth, 2025 was overrated in the public imagination. It was only supposed to be the end of the bad times, and yet we pinned so much hope on it. 

Many imagined a promised land flowing with jobs and money. Groceries would become affordable, house prices could clamber back to outrageous heights, customers would queue out the shop door, and workers would be handed bonuses.

Instead, household costs continued to outrun wages, consumers refused to splurge, jobs were harder to find, Trump’s trade war freaked everyone out, and house prices stayed put.

For many New Zealanders, it was another frustrating year in the desert.

RBNZ and other forecasters have repeatedly raised and then dashed expectations. Two years ago, the central bank expected 3.2% annual growth in 2025. It downgraded that forecast to 2.3% last November, and again to just 1.1% this November.

“The evolution of ‘thrive in 25’ to ‘survive till 25’ to simply ‘survive 25’ sums up how disappointing the economy’s performance has been,” said Gareth Kieran, chief forecaster at Infometrics.

Treasury added to the Christmas cheer last week by warning unemployment might climb to 5.5% in 2026, having previously suggested it would peak at the end of 2024. 

Bevan Graham, an economist at Salt Funds, said the recovery had been slow because it depended on mortgage holders and farmers spending the gains from lower interest rates and high commodity prices.

“Two of the usual key drivers of strong New Zealand growth have been missing: strong population growth as net migration has slumped, and the wealth effect of high house price inflation as the housing market has remained subdued.”  

Consumer confidence has been rising slowly since 2023, but the mood remains negative. Business confidence, by contrast, is at a decade high despite little improvement in actual sales.

“The public were living the tough economic times as they were happening, so I think they were closer to the reality of a struggling economy than we economists were, especially in light of the higher cost of living and the weaker job market,” Graham said.

Inflation has returned to the 1% to 3% target band, but households remain highly sensitive to prices. Rising electricity, rates, insurance and food costs mean many still see inflation as a problem.

Mortgage holders, traumatised by the stress of high interest rates, have used the reductions to pay down debt rather than spending in local shops like economic models assumed.

The story is similar for farmers benefitting from high commodity prices and the sale of Fonterra’s consumer business. ASB economist Wesley Tavanusa estimated 40-60% of proceeds would be spent on reducing debt.

While saving is a smart move for individuals in the long term, it isn’t great for short-term GDP growth. But you cannot blame households for being cautious in such a weak job market.

RBNZ estimates employment has remained steady through 2025, even as the working-age population grew nearly 1%. That leaves zero net new jobs for the country’s 35,000 newest potential workers.

The unemployment rate has risen to 5.3% from 3.3% in 2022 and would have been higher if many workers hadn’t moved to Australia or exited the labour market.

Treasury reports 45,000 fewer people employed than in 2023, and its latest forecasts show a permanently lower GDP growth trajectory compared with May projections due to this smaller workforce.

It remains uncertain whether the country will fully recover from the pandemic. The United Kingdom has never regained the growth rates it enjoyed before the 2008 global financial crisis.

If that seems bleak, fear not, for I bring you good tidings of great joy: economists are forecasting a strong recovery in 2026 (this time, definitely, for sure).