New Zealand Economy: Boom Or Bust In Early 2026?

The standard narrative about the New Zealand economy – the narrative pushed by the Luxon-led government – is that New Zealand's gross domestic product is ever-so slowly climbing out of a hole; a growth hole made by a mixture of New Zealand Labour, and Vladimir Putin and Donald Trump creating a difficult trading environment. Certainly, the growth hole is there – see my New Zealand Economic Growth Update, Scoop, 18 June 2026 – but is it because of factors beyond the present government's making, as Mr Luxon would have us believe? Or is the Luxon/Willis government itself largely to blame? The hole does not extend back to the previous Labour-led government; rather, this is a 'sink-hole' which has taken place under the watch of the present National-led government. In particular, under the watch of Minister of Finance Nicola Willis. This appears reminiscent of the growth hole in the early 1990s overseen by the then National Government, and most associated with Finance Minister Ruth Richardson. The factor in common with both regimes has been fiscal austerity; austerity which undermined aggregate demand and thereby undermined these governments' own revenue bases. Government retrenchment may have generated the very fiscal crises which the two government Ministers claimed they were fixing. But, other than that, and considering New Zealand's trading economy, is New Zealand suffering a short-term economic bust? Or is New Zealand enjoying a cyclical boom which will not last? Is New Zealand currently at the top or the bottom of the metaphorical cliff? Terms of Trade and Import Volumes The most important measure of the international trading environment for a country – especially a country which relies on importing and exporting goods – is called the merchandise terms of trade. It is a measure of the prices of exported commodities relative to the prices of imported merchandise. Big picture first. New Zealand's terms of trade have almost doubled over the last 40 years. That means a given quantity of exports buys nearly twice as many imports in 2025 compared to 1985. That statistic represents an incredibly prolonged period of very good luck for New Zealand and New Zealanders; access to a windfall of imports enabling New Zealand to become a truly first world consumer society. The terms of trade chart, above, reveals a 'game of two centuries'. In the just-over 25 years so far of this century, New Zealand's terms of trade has improved remorselessly by seventy percent – albeit punctuated with a few brief setbacks. That places New Zealand this quarter-century in a similar fortunate place as Norway was in the last quarter of last century; Norway then exported crude and refined oil, New Zealand this century has exported regenerating wealth in the form of green (grass-fed produce), white (wine, milk, and honey), and red (meat). In the years from 1957 to 1986, New Zealand's story was very very different, a decline in the terms of trade of 32 percent in less than thirty years. This was the kind of challenge that led to something very close to fascism in late 1970s' southern South America; and coincided with an elected government in Australia being ousted by a political coup led by that country's Governor General. Further, in New Zealand it was compounded by the substantial loss, for United Kingdom political reasons, of New Zealand's principal market country. New Zealand was more reliant on the British market in the early 1970s than was any other country. By 1984 it had faced up to this 'perfect storm' of challenges, and largely met them. New Zealand was exporting meat to Iran, dairy (and dairy machinery) to the Soviet Union, and wool to China. And New Zealand had embarked on a large-scale "growth strategy" (as the then-government preferred to call it) of energy import-substitution (and indeed energy export, through the production of aluminium from renewably-generated electricity). The first important turning point in New Zealand's terms of trade came, unexpectedly, a year later. It was the substantial real fall in oil prices from 1986. (Another big feature of the global economy at that time – in September 1985 – was the Plaza Accord, which reversed the trading balance between the economies of the biggest players, especially United States and Japan; the core effect was to devalue the US dollar and to substantially revalue the Japanese yen.) Later, in the 1990s, New Zealand appeared to be settling into a pattern of stable commodity prices, in that post Soviet Union time of European restoration. The biggest driver of the bountiful pattern of the last 25 years – of this century – has been China. New Zealand has been a general beneficiary of high 'income elasticity of demand' in the 'Global South', meaning especially in East Asia. The rising export prices New Zealand enjoyed resulted from rapid economic growth in Asia. That export price stimulant may not be over yet. It all depends on the continued per capita growth of the Asian economies; growth continuing to favour higher protein diets in that very large continent. In reflecting the global economic environment, in addition to the upwards trend New Zealand's terms-of-trade seems to reflect a global trade cycle of about three years. Look for the black circles on the chart, especially for this century. The apparent regularity of the 'three-year cycle' may be misleading though, in that the brief but sharp downswings can be related to particular global events: the 911 attacks on New York and Washington, the global financial crisis, the Eurozone crisis, the Syrian refugee crisis, and the early stages of the Ukraine war. What is most apparent is that, based on both the identified trend and the apparent cycle, New Zealand as a trading nation has never been in a more fortuitous situation. With all that demand for New Zealand produce, the New Zealand economy should today be in the best state that it's ever been in (despite, that is, the Ukraine hiccough which adversely impacted global aggregate demand in 2022 and 2023). Regime change in New Zealand New Zealand's political regime-change in 1984 (much more than a mere change of government) translated into an economic regime-change in 1985. As Geoff Bertram noted in the Oxford History of New Zealand, the change was from a political economic establishment dominated by tradable sector interests – think Federated Farmers, Chambers of Commerce, Manufacturers Association – to a political economic establishment dominated by the finance sector. The new broom – which liked to ridicule the Think Big growth policies (of the early 1980s) which focussed on rebalancing the tradable sector in an ambitious and financially sustainable way – came to be called neoliberalism. Neoliberalism remains New Zealand's reigning paradigm to the present day, and the financial services lobby remains stronger than ever (noting the extraordinary hold that KiwiSaver seems to have over us). The red circle in the chart marks the beginning of the new economic regime – the first half of 1985 – when the New Zealand dollar was floated, the financial sector was deregulated, and monetarist 'high interest rate' monetary policies were adopted. The 'current account balance' was abandoned as the number one target of macroeconomic policy – indeed it was largely abandoned as a target at all – and 'inflation' became public enemy number one in the new policy narrative. The more broadly accepted economic growth and employment targets came to be regarded as consequential to getting inflation to (and keeping it at) acceptable levels; at least that was the rhetoric of neoliberal macroeconomics. The placement of the red circle suggests that, in 1985, it was widely believed that the terms of trade would continue their steady downward path, and that New Zealand would have to reinvent itself; perhaps as a financial services centre. Relatively more money would flow into the country as 'investment' – as defined by financial servants, not by Keynesian economists – and relatively few tears would be shed for demotion of the tradable sector. In practice, in 1985, New Zealand (considered as a private-public financial partnership) launched the world's most successful Ponzi Scheme. High interest rates (needed to prop up the newly floated New Zealand dollar), and liberalisations of the financial sector, would draw in investor funds – much of it 'hot money', otherwise known as the 'carry trade' – which would be serviced (and paid out when necessary) from subsequent inflows of financial capital. New Zealand – or at least New Zealand's more financially wealthy segment – would be able to import, with minimal constraint, the best goods and services that the world had to offer, and without being constrained by stagnant or diminishing export receipts. Of course, neither Finance Minister Roger Douglas nor his 'new broom' Treasury masters consciously thought of this policy as a Ponzi scheme. Nevertheless, that's exactly what it was; a financial scheme to access global goods and services which were in abundance thanks to miserly savings rates in especially Europe and Japan. (We also note that this was never a secret Ponzi scheme; for those who can read the financial tea leaves, this was a cunning scheme hiding in plain sight.) We note that the big global events that turned around New Zealand's terms of trade happened independently, a full year after the regime change in New Zealand. Nevertheless, the reversal of the terms of trade decline reinforced the new import-facilitating financial regime. The New Zealand Ponzi Scheme which was inaugurated in the first half of 1985 would be helped by fortuitous decreases in import prices – especially oil – as well as increases in the prices of New Zealand's traditional (and later non-traditional) exports. Demand growth – rapid demand growth – was now coming from Japan and South Korea and from other East Asian capitalist economies. That process paused in the 1990s, with Japan in particular having to deal with the consequences of its financial collapse from 1991, and especially as a result of the Asian Financial Crisis of 1997 and 1998. The process of East Asian demand growth resumed from 2000; with the added bonuses of China joining the New Zealand party and California's discovery of New Zealand (think Americas Cup and Lord of the Rings). New Zealand has enjoyed an import bounty My second chart, above, shows the growth of import volumes in the same period, from 1957 to the present. The dashed line shows a trend of six-percent annual growth of import quantities from 1985 to 2008, with the six-percent trend resuming for another decade after the 2008/09 Global Financial Crisis. (We note that after 1975 – during the 'international stormy seas' years from 1974 to 1984, when the National government came into power – import volumes dropped in the late 1970s, and then restored in the early 1980s as the import requirements of the new import substitution growth strategy – Think Big – took precedence.) In the years before 1973, the growth trend of imports – significantly less than six-percent per year – roughly matched the growth of export volumes and the growth of GDP; that is, imports then were not outgrowing the rest of the economy. We also note that the blip in imports in 1974 and 1975 (and the crash in 1976) largely reflected the huge increase in New Zealand's terms of trade then known as the 'commodity boom'. New Zealand's exportable product prices went up first, and oil prices – oil being New Zealand's principal importable commodity – went up dramatically at the end of the commodity boom; the main trigger – but not the only cause – of the quadrupling or crude oil prices was the October 1973 Israel war against principally Egypt and Syria. The six percent annual growth of import volumes (from 1985 to 2008) contrasts with less than three percent annual economic growth over that same period. That's two decades in which exponential import growth was more than twice as fast as the growth of economic output. Further, if we look at 1987 to 2018, six percent annual growth of import quantities for three decades, the average annual economic growth rate was under 2.7 percent. That's creaming it; literally in part (from dairy exports), and (in approximately equal part) as a result of the continuance of New Zealand's successful Ponzi scheme. That scheme began in 1985 when expectations were that the traditional New Zealand economy was fizzing out. What about now? The chart of import volumes shows a remarkable decline in the rate of import growth in the 2020s. This may be in part due to the short-lived decline of New Zealand's terms of trade in 2023. With terms-of-trade reaching a record high in December 2025, however, that import growth should recover. (We note that import growth did recover after the Richardson-inspired austerity recession of 1991 and 1992.) But import growth will probably never recover to the six-percent annual growth rate that a complacent New Zealand enjoyed for three decades. Are we reaching the denouement of the Ponzi Scheme inaugurated by Roger Douglas early in 1985? The answer, of course, is 'maybe'. I note that it was only the recent rises in New Zealand's terms-of-trade that have kept the exchange rate of the New Zealand dollar 'above water'; and then, only just. This month the dollar has been falling again. On a trade-weighted basis, the New Zealand dollar in May 2026 was priced exactly the same as it was in September 1985. (It maxed in July 2014, at a time when the central banks of Denmark, Sweden, Switzerland and Japan were establishing negative wholesale interest rates; meaning at a time that New Zealand was a particularly attractive target for the international carry trade.) As time went on, New Zealand's Ponzi-based economy became increasingly difficult to service. Hence New Zealand has not really been able to fully capitalise on the escalating fortune it has enjoyed as this century has progressed. The lower socio-economic groups, in particular, have been missing out. New Zealand may now be at the peak of periods of both long-term and short-term good fortune. The summer of 2025/26 may be as good as it gets. Or the long run trend may extend for another three-year cycle. Certainly, the pursuit of anti-growth fiscal policies – policies designed to suppress aggregate demand – make it much harder for New Zealanders to service their ever-increasing global liabilities; support by the New York credit rating agencies for the Luxon/Willis policies notwithstanding. This Ponzi Scheme's continuance relies on the performative trick of persuading foreign 'investors' that they will continue to receive returns from New Zealand similar to those returns they have enjoyed since 1985. The scheme's continuance will also be facilitated by one-percenter semi-immigrants buying real-estate in New Zealand, keeping the money churning. Foreigner faith in New Zealand's ability to continue to deliver the goods will be tested in the years ahead.