New Zealand's hoped-for economic recovery is facing fresh challenges, according to Kiwibank economists Jarrod Kerr and Alexandra Turcu, who say rising global uncertainty, higher interest rate expectations and a struggling construction sector are combining to slow momentum across the economy.
By Elocal Economics Desk
Speaking on the latest episode of Markets, Mystics & Mayhem, the pair examined the fallout from unexpectedly strong US employment data, which sent shockwaves through financial markets and raised concerns that central banks may keep interest rates higher for longer.
Despite stronger-than-expected payroll numbers in the United States, investors reacted negatively, fearing that a robust labour market could force the US Federal Reserve to raise interest rates rather than cut them.
The result was a sharp sell-off on Wall Street.
"Between market open and market close, the S&P 500 dropped 2%," Kerr noted, highlighting the scale of the move despite the seemingly modest percentage decline.
The economists argued that markets remain heavily dependent on expectations of lower interest rates, making them vulnerable whenever economic data suggests inflationary pressures may persist.
The AI Boom Continues — But Where Are The Productivity Gains?
One of the most fascinating parts of the discussion centred on the enormous wave of investment flowing into artificial intelligence.
According to Kerr, trillions of dollars are now being directed toward AI infrastructure, data centres and related technologies.
Estimates discussed during the podcast suggested AI-related investment could grow from around US$6 trillion this year to as much as US$16 trillion annually by 2030.
Yet despite the scale of spending, the economists questioned whether businesses are actually seeing measurable returns.
Turcu noted that much of the investment remains speculative, with productivity gains still difficult to identify.
"It's still way too early to find productivity gains yet," she said.
The pair observed that while many workers are already using AI tools to complete tasks more efficiently, the benefits are often not yet appearing in company profit figures.
Instead, early gains appear to be flowing primarily to employees who can complete work faster rather than to shareholders.
Kerr suggested the real turning point will come when businesses can clearly measure how AI improves productivity and then translate those gains into higher profits.
Until then, the AI boom remains largely a story of future expectations rather than realised returns.
Global Interest Rates Moving Higher Again
The discussion also highlighted a dramatic shift in global interest rate expectations.
Only months ago, financial markets were pricing in multiple rate cuts by the US Federal Reserve.
Now, following stronger economic data and persistent inflation concerns, markets are beginning to price in potential rate hikes instead.
Kerr noted that political pressure is also mounting in the United States, with President Donald Trump publicly calling for lower interest rates while warning against policies that could "kill success."
The economists stressed that maintaining central bank independence remains critical, particularly given the importance of US Treasury markets to the global financial system.
For New Zealand, rising US interest rates matter because local borrowing costs tend to follow developments offshore.
"Australia and New Zealand yields are nothing but a spread to what's happening in the US," Kerr explained.
Reserve Bank Rate Hikes Loom
Closer to home, the conversation turned to growing expectations that the Reserve Bank of New Zealand may soon begin raising interest rates again.
Financial markets are now largely pricing in an RBNZ hike as early as July, with multiple increases expected before the end of the year.
While the Reserve Bank remains focused on inflation risks, the Kiwibank economists expressed concern that tighter monetary policy could arrive at precisely the wrong time.
Kerr argued that the economy is already struggling to regain momentum and that additional rate increases could further delay recovery.
"We're worried about growth. They're worried about inflation," he said.
Housing Market Splits Into Two New Zealands
One of the most striking themes from the discussion was the growing divergence in regional housing markets.
Nationally, asking prices have largely moved sideways since 2023.
Auckland remains flat. Wellington continues to struggle.
Meanwhile, Queenstown and the wider Lakes District are experiencing extraordinary price growth.
According to figures discussed in the podcast, asking prices in the Lakes region have risen by more than 20 percent over the past year.
Average prices in Queenstown have reportedly moved above $2 million, while nearby Wānaka is approaching $1.7 million.
The economists believe international demand is playing a significant role.
Queenstown increasingly operates as a global lifestyle market rather than a purely domestic housing market.
Kerr joked that wealthy international buyers seeking a New Zealand retreat are unlikely to choose Hamilton when they can purchase property in one of the world's most desirable alpine destinations.
The result is a growing gap between New Zealand's strongest and weakest housing regions.
While Queenstown surges ahead, Wellington continues to face pressure from public sector job cuts, weaker population growth and broader economic uncertainty.
Construction Sector Still Under Pressure
Despite some encouraging signs in building consent data, the broader construction sector remains under significant strain.
Residential consents rose strongly in April, particularly for higher-density housing developments such as townhouses and apartments.
However, actual construction activity continues to weaken.
Data discussed during the podcast showed a significant decline in the value of building work being completed across the country.
The downturn is becoming increasingly visible on the ground.
Kerr described conversations with builders, contractors and construction firms who are reporting a substantial reduction in work.
He also recounted hearing about another builder entering liquidation, describing it as evidence that the slowdown is becoming widespread.
"Construction is down about a third," he said.
The economists warned that weaker construction activity could place downside risk on upcoming GDP figures and further delay economic recovery.
Iran Conflict Adds Another Layer Of Uncertainty
A recurring theme throughout the conversation was the impact of the conflict involving Iran on global energy prices and economic confidence.
The economists argued that higher diesel costs and ongoing uncertainty are placing additional pressure on businesses and households.
For construction firms in particular, higher transport and material costs continue to squeeze margins and slow activity.
Turcu suggested that a return to more stable energy markets would be one of the key ingredients needed to support a broader recovery.
Recovery Delayed, Not Defeated
Despite the challenges, neither economist believes New Zealand is heading toward a major economic collapse.
Instead, they see a recovery that has repeatedly been pushed further into the future.
"We came into this year really optimistic," Kerr said.
"The green shoots looked like they were going to take hold and grow into something meaningful. The war in Iran really did derail us yet again."
The pair argued that New Zealand's recovery remains intact but is likely to be slower and more frustrating than many had hoped.
Higher interest rates, weak construction activity, global uncertainty and rising energy costs are all working against the economy at a time when businesses and households were expecting conditions to improve.
The Bottom Line
The latest assessment from Kiwibank's economics team paints a picture of an economy caught between recovery and renewed disruption.
Financial markets remain captivated by the promise of artificial intelligence, but tangible productivity gains are still emerging. Interest rates are moving higher globally just as New Zealand's construction sector continues to struggle. Meanwhile, the housing market is increasingly splitting into winners and losers, with Queenstown and the Lakes region racing ahead while much of the country remains flat.
The message from Markets, Mystics & Mayhem is not one of crisis, but one of patience.
The recovery has not disappeared.
It has simply become more complicated.