After another difficult year, attention is already turning to NZ’s economy in 2027 and whether the recovery Kiwis have been waiting for will finally arrive. We sat down with Chief Economist Jarrod Kerr to discuss what could drive the economy forward, where inflation and interest rates are heading, what could happen to the property market and what the next government needs to get right.
NZ’s Economy in 2027 Could Finally Regain Momentum
It has been another frustrating year for households and businesses waiting for the economy to turn a corner.
The year began with promising momentum, but another shock from the war in the Middle East and rising fuel prices disrupted that recovery. Add an election into the mix, and some households and businesses are once again delaying decisions while they wait for greater certainty.
Jarrod says this hesitation can have a direct impact on economic growth. Businesses may delay investing or hiring, pushing decisions into another year and slowing activity in the process.
However, beneath those challenges, he believes there is still momentum that could support NZ’s economy in 2027.
Tourism numbers are back to pre-COVID levels, the weaker New Zealand dollar is helping make the country attractive to Australian visitors, and manufacturers selling into Australia are benefiting from the exchange rate.
The hope is that recent shocks have postponed activity rather than stopped it altogether.
What Could NZ’s Economy in 2027 Look Like?
By October 2027, Jarrod expects New Zealand could be in a better position than it is today.
If forecasts are close to the mark, inflation could have fallen back, the impact of higher petrol and diesel prices could be behind us, and economic growth could be running at around 2.5% to 3%.
That would be a significant improvement on current conditions.
But several things need to happen for NZ’s economy in 2027 to deliver that recovery.
The housing market needs to stabilise and begin seeing some price appreciation, helping support activity elsewhere in the economy. Households also need to reach a point where their incomes are growing faster than inflation.
Household consumption is particularly important. Jarrod describes it as the missing piece of the Kiwi economy right now, accounting for around 60% of activity.
Parts of the economy, including farming, are performing relatively well. But households remain under pressure, and another fuel price shock has made that recovery harder.
Could Inflation Fall Back to 2%?
Inflation is currently sitting at 4.1%, with Jarrod attributing most of that spike to petrol and diesel.
While short-term fuel-driven inflation would normally be something to look through, repeated price shocks have created concerns that higher costs could begin flowing through into domestic prices.
Jarrod’s view is that the economy remains weak enough that businesses will struggle to pass much of those additional costs on.
His forecast is for inflation to fall from 4.1% to 2% by this time next year, a forecast he says is not significantly different from the Reserve Bank’s own expectations.
The Reserve Bank has already delivered two rate hikes, with Jarrod suggesting another one or two could still happen.
However, much of that movement has already been priced into wholesale interest rates. That means longer-term fixed mortgage rates may not necessarily experience the same increase people might expect when they hear about another OCR hike.
Why Higher Fuel Prices Are Still a Problem
One of the biggest setbacks to the recovery has been the renewed increase in petrol and diesel prices.
Higher fuel costs put pressure on households, particularly those already struggling, while also increasing costs for businesses.
Jarrod says recent events have highlighted just how dependent the New Zealand economy remains on diesel.
There could be a longer-term shift as a result.
He is already seeing businesses draw down funding for more efficient machinery and vehicles or alternatives that don’t rely on diesel. For farmers in particular, the issue hasn’t only been price – concerns about actually accessing diesel have exposed another vulnerability.
While that could accelerate electrification and investment in alternatives over time, the immediate effect of higher prices remains painful for households and businesses.
What Could Happen to the Property Market?
A stronger property market could also play a role in improving economic confidence.
Jarrod expects house price growth to average closer to 5% rather than the 7%, 8% or 9% seen previously, although conditions vary significantly around the country.
Auckland and Wellington remain weak, with prices flat to down and still well below their 2021 peaks. Christchurch is more buoyant, although additional supply is creating some concern, while parts of Southland have experienced much stronger growth.
Those differences matter beyond homeowners simply feeling wealthier.
For small business owners who have used their homes as collateral to fund their businesses, rising property values can also influence confidence and their willingness to invest.
Could the property market suddenly accelerate in 2027?
Jarrod considers a significant surge a low risk, but not impossible. He points to Queenstown, where prices have increased substantially, although he views it as a different type of market with significant high-net-worth and international activity.
A 10% or 20% nationwide increase over the next year is highly unlikely in his view, but it isn’t completely outside the realms of possibility.
Could New Zealand Outperform Australia?
Another interesting shift could be happening across the Tasman.
New Zealand’s economy has underperformed Australia, contributing to a weaker Kiwi dollar against the Australian dollar. But Jarrod believes that dynamic could begin changing.
He points to changes that have slowed the Australian economy and its property market, while New Zealand could begin regaining momentum.
His expectation is that New Zealand will outperform Australia next year.
The weaker Kiwi dollar is already providing some support, helping tourism and making New Zealand-manufactured products cheaper for Australian buyers.
Is the Election Really Holding the Economy Back?
With an election approaching, uncertainty is inevitably influencing the conversation.
Some households and businesses say they are holding off decisions until they know what the next government will look like.
Jarrod is less convinced that elections themselves create a significant stop-start effect on economic activity. Historically, he says, elections haven’t been a major driver of businesses switching investment decisions on and off.
Property investors, however, have been expressing concerns for much longer about potential policy changes, including a capital gains tax and changes to interest deductibility.
The bigger issue may be New Zealand’s tendency to think in three-year political cycles when many of the investments required to improve the economy need decades of planning.
Infrastructure Could Be the Key to Stronger Growth
Asked what he would do if he were making the economic decisions, Jarrod’s first answer was clear: invest.
He believes New Zealand should put more time, money and effort into infrastructure and rebuilding the economy, including taking on more debt to do it.
The distinction, in his view, is between good debt and bad debt.
Borrowing to fund infrastructure could provide work for construction and engineering companies today while creating the foundations for a faster-growing and more resilient economy in the future.
Infrastructure also connects directly to New Zealand’s productivity challenge.
Time lost commuting, inadequate water infrastructure and other shortcomings all contribute to weaker productivity. Jarrod argues investment also needs to extend to health, education and technology.
Technology and AI could deliver significant productivity gains, but the country still needs the infrastructure required to support them.
Breaking Out of the Three-Year Cycle
One of the challenges is that major infrastructure projects don’t fit neatly within election cycles.
Jarrod suggests using an infrastructure fund with a 10, 20 or 30-year mandate, allowing projects to continue regardless of which party is in government.
That could provide businesses with longer-term contracts and greater confidence to hire staff, buy machinery and invest in their own growth.
Public and private investment could both play a role.
Jarrod sees public-private partnerships as part of the answer, bringing private companies and expertise into major infrastructure projects while government helps determine where investment is needed.
The goal would be to move away from repeatedly starting and stopping major projects and instead take a longer-term approach to the infrastructure New Zealand needs.
Key Takeaways
- Jarrod expects NZ’s economy in 2027 to be in a better position than it is today if current forecasts are close to the mark.
- Economic growth could reach around 2.5% to 3%, but household spending needs to recover.
- Inflation is forecast to fall from 4.1% to around 2% by this time next year.
- Another one or two OCR hikes could occur, although much of the increase is already priced into wholesale rates.
- Higher petrol and diesel prices continue to put pressure on households and businesses.
- The fuel shock could encourage businesses to invest faster in more efficient machinery, vehicles and alternatives to diesel.
- Jarrod expects house price growth to average closer to 5%, although conditions vary considerably around New Zealand.
- A significant nationwide property surge is considered unlikely, but not impossible.
- Jarrod expects New Zealand to outperform Australia next year as the Kiwi economy regains momentum.
- Infrastructure investment could play a major role in improving productivity and supporting a stronger economic recovery.
- Longer-term infrastructure planning could give businesses greater certainty to invest, hire and grow.
- The recovery ultimately depends on households reaching a point where incomes are rising faster than inflation.
Next Steps
If you’re wondering what changing interest rates, inflation, the property market and the outlook for NZ’s economy in 2027 could mean for your finances, speak to the Lighthouse Financial team about building a plan around your goals.
If you’d like to watch more, check out this episode below.
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The information in this article is general information only, is provided free of charge and does not constitute professional advice. We try to keep the information up to date. However, to the fullest extent permitted by law, we disclaim all warranties, express or implied, in relation to this article – including (without limitation) warranties as to accuracy, completeness and fitness for any particular purpose. Please seek independent advice before acting on any information in this article.
