New Zealand Slides Into Recession Amid Sharp Economic Slowdown. What Are The Global Headwinds For 2025?

New Zealand officially entered a recession in the third quarter of 2024, with data revealing an unexpectedly steep economic downturn that rattled the country’s currency and ignited a political blame game.

The conservative coalition government defended its fiscal prudence, emphasizing “respect for taxpayers’ money,” while the opposition accused it of aggravating the economic woes with austerity measures.

After months of hovering near recession, New Zealand’s economy finally tipped over the edge, weighed down by persistently high prices, soaring borrowing costs, and an ongoing housing crisis. Gross domestic product (GDP) fell by a staggering 1.0% from July to September, far surpassing analysts’ forecasts of a modest 0.2% contraction. This follows a revised 1.1% shrinkage in the second quarter, marking two consecutive quarters of negative growth.

“This one-percent drop is substantial and far weaker than anticipated,” noted Kiwibank economists in a report. Excluding the Covid-19 pandemic, the current six-month stretch represents the weakest economic performance since 1991.

The downturn has spread across most sectors, according to Kiwibank, though a statistical revision earlier in the year somewhat offsets the latest grim figures. The report expressed cautious optimism that the third quarter might represent the low point in the cycle, with recent interest rate cuts potentially providing relief.

The New Zealand dollar fell sharply, trading at US$0.5626 in the late afternoon, down 1.8% from the previous day, as traders digested the depth of the economic slump.

In response, the government released a statement stating its commitment to economic growth and fiscal responsibility. Finance Minister Nicola Willis acknowledged the challenging situation, citing high inflation and tight monetary policy as the primary culprits. “The Reserve Bank engineered this recession to combat inflation, and the economy has felt the strain,” Willis explained, but she forecasted a rebound in the coming quarter and stronger growth by 2025.

Opposition Labour Party finance spokesperson Barbara Edmonds, however, laid the blame squarely on the government. “Nicola Willis’ austerity measures have fanned the flames of this recession,” Edmonds charged. “No amount of creative accounting can disguise these GDP figures.”

What Are the Global Headwinds for 2025?

Moving forward, the year 2025 is set to test global resilience once again, with challenges spanning economic, political, and market dynamics. Against a backdrop of elevated U.S. equity market valuations, mega-cap dominance, and the uncertainty surrounding U.S. President-elect Donald Trump’s policy agenda, the focus will be on adaptability and strategic foresight to mitigate a volatile environment.

Political Uncertainty Around Trump

Uncertainty is a constant in global markets, but Donald Trump’s return to the White House adds a fresh layer of ambiguity to the 2025 outlook. His administration’s approach to key campaign promises—such as sweeping tariffs, immigration restrictions, and forced deportations—remains unclear.

Should the initial focus be on tax cuts and deregulation, equity markets could respond positively. However, if early moves prioritize tariffs and immigration controls, investor sentiment may take a hit.

The U.S. Economy

The U.S. economy is expected to grow at a moderate pace of 2.0% in 2025, reflecting the delayed effects of the Federal Reserve’s previous tightening measures. While core personal consumption expenditures (PCE) inflation is projected to align closer to the Fed’s 2% target, gradual rate cuts are likely, with the federal funds rate potentially easing to 3.25% by year-end—a neutral level that supports sustainable growth.

Despite this soft-landing scenario, risks remain. A slower economy could lead to job market weakness, prompting consumers to pull back. Sustained weekly jobless claims above 260,000 would indicate deeper economic pain, while lower claims would signal resilience despite tight monetary conditions.

Trump Administration’s Policy Trade-offs

The Trump administration’s policy choices will play a pivotal role in shaping the economic narrative for 2025. While tax reforms and deregulation are expected to boost domestic and cyclical sectors, aggressive tariffs and restrictive immigration policies could lead to stagflationary pressures—combining slower growth with higher inflation.

Voters’ dissatisfaction with inflation during the Biden years is likely to temper the administration’s more extreme policy measures. Tariffs and immigration controls may be implemented, but their scope will likely be moderated to avoid exacerbating inflation risks. On balance, the policy mix is anticipated to foster business confidence, supporting a recovery in capital markets and creating favorable conditions for private investments.

Around The World

Outside the United States, economic growth in 2025 is likely to remain under strain, with trade policy uncertainty and tariffs casting a long shadow over Europe. The European Central Bank (ECB) is expected to lower its deposit rate to 1.5% by year-end to mitigate the effects of these trade tensions and the persistent stagnation in Germany’s economy.

In the United Kingdom, sluggish productivity growth, labor shortages, and inflationary pressures stemming from higher taxes under the new Labour government will weigh on economic momentum. The Bank of England (BoE) faces limited room for maneuver, with base rates projected to decline only modestly to a range of 3.75%–4.0%.

Japan, meanwhile, continues to defy global trends. A virtuous cycle of rising wages and prices is stabilizing inflation expectations near the 2% mark, enabling the Bank of Japan (BoJ) to further normalize its monetary policy. Interest rates in Japan could climb to a 30-year high of 0.75% by the end of the year, marking a significant shift from its prolonged era of ultra-low rates.

China confronts a host of challenges, including a struggling property market, deflationary pressures, and ongoing U.S. tariffs. Policy responses have been largely reactive, falling short of addressing deeper structural issues such as high household savings and low consumption. GDP growth, projected at 4.5% for 2025, faces downside risks as these systemic issues remain unresolved.

Market Sentiment and Valuations

Three key factors define the market outlook for 2025 – elevated U.S. equity valuations, the potential for further U.S. dollar strength, and the trajectory of the U.S. 10-year Treasury yield.

The S&P 500 forward price-to-earnings (P/E) ratio, currently at 22x, leaves U.S. equities vulnerable to negative surprises. Strengthening of the U.S. dollar could further challenge emerging markets, particularly those with dollar-denominated debt.

Sustained U.S. Treasury yields above 4.5% would put additional pressure on equities by narrowing the earnings yield advantage that stocks have historically enjoyed over bonds since 2002. This shift could drive a reassessment of risk-reward dynamics across asset classes, amplifying market volatility.

Other Set Of Challenges

—China’s Economic Rebalancing: As China witneses slower growth and shifts towards domestic consumption, its role in global trade will continue to evolve.

—Energy Transition: The ongoing shift towards renewable energy and decarbonization efforts will reshape industries, requiring significant investments and adaptations.

—Geopolitical Tensions: Rising geopolitical risks, including potential conflicts and trade disputes, will weigh on global markets and investor sentiment.

—Global Trade Slowdowns: As major economies like China and the U.S. navigate their own challenges, smaller economies face reduced demand for exports.

2025

As the world braces for another year of complexity, the key in 2025 will lie in building resilience—both at the macroeconomic and portfolio levels. Adaptable strategies, prudent policymaking, and a focus on sustainable growth will be critical in overcoming the headwinds and seizing the opportunities that lie ahead.