Credit crunch and green shoots: navigating New Zealand’s economic headwinds
A majority of directors in the ASB/IoD 2024 Director Sentiment Survey expected the economy to improve over the next 12 months, up from just 28.3% in 2023. We reflected this in the “Return on capital” Top 5 issue for directors in 2025, noting:
“With financial pressures still a reality, directors are focused on finding ways to deliver solid returns on capital. New Zealand’s economy is on a slow path to recovery, inflation is easing, interest rates are on a downward trend and there is a chance of modest growth. These changes open the door for rethinking strategies and making investments that could pay off in the long run, even as industries, such as retail and construction, continue to feel the pinch of weak demand.”
Early March 2025 seems like a good time to look at New Zealand’s economic fortunes as we approach six months since the sentiment survey was completed.
It is clear from recent information that directors are confronted with an intricate narrative of recovery, persistent financial challenges and emerging but small signs of renewed economic growth.
Balancing the books in a shifting landscape
Recent commentary from ASB Bank’s Economic Weekly underscores that while the backdrop of low interest rates continues to stimulate borrowing and investment, the stark reality remains that financial returns are not keeping pace. We are seeing this during the most recent reporting season. This divergence is particularly concerning for directors tasked with steering their organisations through a phase where the cost of capital is rising faster than profit margins. ASB’s analysis suggests that despite a favourable borrowing climate, companies continue to need to be astute in deploying their investment and financing it to deliver expected returns. Put differently, the advice in the “Return on capital” top 5 issue remains as pertinent now as it did ate last year.
Mixed signals from monetary policy
The Reserve Bank of New Zealand’s Monetary Policy Statement for February 2025 offers a cautious yet forward-looking perspective. In a detailed exposition of policy adjustments, the central bank noted that while economic growth is on an upward trajectory, inflationary pressures and credit return issues are forcing a re-evaluation of risk models. For directors, the takeaway is clear: while monetary easing has underpinned a short-term recovery, long-term structural challenges such as stagnant productivity and global supply chain disruptions are still unresolved. The productivity challenge particularly was reinforced in a New Zealand Treasury paper The productivity slowdown: implications for the Treasury’s forecasts and projections from May last year.
Business sentiment and the director’s dilemma
The New Zealand Institute of Economic Research (NZIER) provides further context through its Quarterly Survey of Business Opinion. The survey reveals a sentiment of cautious optimism among business leaders who acknowledge that while "green shoots" of recovery are evident, these signals mask underlying weaknesses in sectors most affected by credit constraints. For directors, these insights emphasise the importance of revisiting their organisation strategy to reflect the changing circumstances and prepare for future growth. The necessity to streamline operations and re-evaluate financing strategies is paramount, as firms prepare for a possible tightening in credit availability.
Green shoots amid credit concerns
Recent media reportss also illustrate the economic duality that economic commentators have observed in full force. A report by Radio New Zealand highlights that although lower interest rates have spurred initial recovery, worrying trends in the job market could undermine long-term economic stability. Similarly, BOP Business News and Stuff point to burgeoning optimism with “green shoots” of recovery, yet stress that these signs are not sufficient to fully offset the broader challenges of return on credit.
The divergence between a supportive monetary policy environment and the operational realities faced by businesses creates a strategic conundrum for New Zealand directors. While the macroeconomic signals provide hope for a turnaround, the microeconomic stresses, particularly in terms of capital efficiency and credit returns, require immediate attention.
Strategic imperatives for directors
For directors, the current economic environment demands a recalibration of strategy. Firstly, there is an urgent need to scrutinise investment decisions, ensuring any expansion financed through credit is supported by realistic return expectations. Emphasis should be placed on optimising operational efficiencies and exploring avenues to enhance revenue streams even amid uncertain economic conditions.
Secondly, directors must foster closer engagements with financial institutions. Understanding the evolving risk landscape and the potential recalibration of lending criteria will be critical. A proactive dialogue with banks like ASB Bank and insights from the Reserve Bank can inform more resilient financing strategies.
Finally, while green shoots offer a reason to celebrate small wins, a comprehensive risk management framework remains essential. This can draw on the scenario work that many companies have started, including as part of their preparation of climate related disclosures.
he economic narrative for New Zealand in the early part of 2025 is one of contrasts: robust but relatively weak recovery signals underpinned by easing monetary policies yet shadowed by persistent challenges in financial returns. As directors steer their organisations through this complex landscape, a blend of strategic foresight, operational agility, and close monitoring of financial trends will be paramount. Balancing optimism with caution, today’s leaders must ensure that their decisions not only capture the fleeting green shoots of recovery while building resilient organisations well placed to take on the economic recovery.
*AI assisted