New Zealand’s economic car is still in the ditch

Thursday, 18 September 2025

At the heart of Christopher Luxon’s pitch is that he is the turnaround guy who can whip things into shape and get the economy moving, writes Luke Malpass.

ANALYSIS: Back on track. A turnaround job. Re-learning the lessons of economics. Doing things differently. Getting the car out of the ditch.

All phrases that Prime Minister Christopher Luxon has regularly used or uses when talking about the Government’s economic reform programme.

The very sharp 0.9% economic contraction for the June quarter would only be really bad if the prime minister was already unpopular and had made this year all about growth.

Oh, hang on, he is. And he did.

First, a word of caution. Because it is such a sharp drop and so far exceeded market expectations there could be some something statistically weird going on. And if so, it might spring back to being very positive the next quarter.

Nevertheless it would appear that, as far as the economy is concerned, the car is very much still in the ditch, more beaten up than first thought, and its wheels are spinning in the mud.

Finance Minister Nicola Willis fronted on the terrible numbers, defended and explained. Luxon was nowhere to be seen but Willis said she had spoken to him about keeping the economic growth portfolio.

Both Luxon and Willis have been trying to tamp down the significance of an expected bad set of figures for weeks, trying to tell people to be more positive about the economy and relentlessly talking up how Trump’s Liberation Day has had a massive impact on confidence.

The reaction after Thursday’s GDP report was much with same. Willis argued that the effect on the psyche of Liberation Day was worse in New Zealand than elsewhere in the world. In other words it wasn’t really the tariffs themselves - it was all the uncertainty they added.

One person who didn’t seem so uncertain was Willis’ predecessor in the finance portfolio for National, former leader Simon Bridges. He wrote a barbed LinkedIn post in response to the past few weeks of Government messaging around the economy.

“About a month back I said conditions were pretty grim in Auckland and government needed to stimulate the economy.” Bridges wrote.

The Finance Minister has reacted to the 0.9% GDP contraction by saying the economy “suddenly had the stuffing knocked out of it” by the US tariffs.

“A few called me a negative nelly, but today’s GDP data highlights we should see business conditions and the economy as they are, not as we’d like them to be. This applies to bank economists and other pundits as well dare I say it.”

The 0.9% quarterly drop was almost double what the market expected and it was even worse on a per capita basis. Per person, the economy contracted by 1.1% over the last quarter and more than 1.3% since a year ago.

New Zealanders are going backwards. The economy as a whole is going backwards. There are certainly bright spots - there always are. But the downturn is broad-based. Liberation Day will have had some effect, but it doesn’t explain most of it.

And while Willis pointed to international factors being to blame for the sharp drop, politically that never works well. Ask Labour about blaming inflation on the war in Ukraine.

The thing National will be keen to note - which Willis did at a hastily arranged 1pm press conference in her office - is that the data is retrospective and that it shows what happened in the months of April to June. That is right and things may be better now, not least with some of the lower interest rates sloshing through the economy.

But that boon for households is not necessarily being spent. According to the RBNZ figures reported by The Post in August, households had paid an extra $17 billion off their mortgages. People are saving for the next rainy day, not spending.

We’ve been expecting green shoots for well over a year now and it’s been in fits and starts. Privately - as well as occasionally publicly - big company CEOs are very worried about the economy. Who knows where the next GDP numbers will land?

As Stephen Toplis from BNZ Research told The Post, the quarter was already looking very bad prior to Liberation Day on account of the fact that there was “no real disposable income in the economy”.

To say this is problematic day for the Government is an understatement. At the heart of the Luxon pitch is that he is the turnaround guy who can whip things into shape, get the books back into balance and get the economy moving.

But the economy is proving remarkably resistant to any whipping, and Willis was at pains on Thursday to point out that the Government is already spending more money year-on-year and stimulating the economy with borrowed cash.

It’s become one of the ironies of this Government that it takes credit for interest rates cuts delivered by the Reserve Bank - most of which are now happening precisely because the economy is in a pretty parlous state.

That said, a 50-basis point rate cut in October - which now appears all but assured - would prove politically helpful for the Government again. We live in uncertain times and the recovery may already be beginning. Or not.

At the start of 2025 Luxon in his State of the Nation speech said that this a year of “going for growth”. So far there has been none, and per person, New Zealanders have gone backwards.

The Government has a plan it says will work. The question now is, how long are people prepared to wait for that?