Walk through Wellington, and you will see plenty of empty shopfronts and shuttered cafes. Switch on the radio, and you will hear experts say this is the best time to buy a house in years.

Talk to shoppers, and they will tell you about cost-of-living pressures. Listen to the Reserve Bank, and they will tell you inflation is back within its target band.

These are contradictory messages. Yet they all make sense, because the New Zealand economy in late 2025 is a complicated mix.

Business confidence has surged to an 11-year high. Retail spending jumped 1.9 per cent in the September quarter. The Official Cash Rate is down to 2.25 per cent, its lowest in more than three years.

Eleven years ago, when confidence last reached these levels, economist Paul Bloxham dubbed New Zealand a “Rock Star Economy.” The government hopes for an encore, counting on rising house prices to carry it to the 2026 election.

Unfortunately, the resemblance is superficial.

The 2014 recovery was powered by high export prices, record migration, and the Christchurch rebuild. Even then, the growth owed more to good fortune than to domestic reform. The 2026 recovery has none of these. Export prices are high but not record-breaking, migration is modest, and there is no reconstruction stimulus.

What New Zealand has is a zombie rock star economy. It looks like a boom on the surface, fuelled by cheap credit and rising asset prices. But it lacks the fundamentals of productivity and population growth.

The starkest difference is demographic. In 2016, New Zealand enjoyed a brain gain: a net migration surplus of 69,100. Young Kiwis stayed home as Australia’s mining boom faded, while skilled workers came the other way.

This kept wages steady and supported growth without sparking inflation.

Now the flow has reversed. New Zealand is still importing workers, but it is also exporting citizens at record pace.

In the year to September 2025, the country lost a net 46,400 citizens, driven by 72,700 departures. Most went to Australia. This exodus exceeds the outflows of the Global Financial Crisis.

This is not a blip. New Zealand is losing its young talent for good. Departure lounges are full of 18-to-30-year-olds drawn by the lifetime earnings premium across the Tasman. A one per cent mortgage rate drop does not compensate for a 30 per cent income gap.

The 2026 housing recovery will not be driven by new arrivals. With land tightly controlled by planning rules, cheaper mortgages will mostly bid up existing stock. The government is replacing the Resource Management Act, but the effects will take years to emerge. Until then, all we will have is asset inflation pretending to be growth.

Beneath the headlines, the picture is weak. The Reserve Bank has forecast productivity growth of less than 0.5 per cent a year. With productivity so weak, wage rises will either eat into profits or reignite inflation.

During the original rock star era, policy settings encouraged businesses to expand by adding workers rather than investing in technology. Productivity growth slowed to virtually zero around 2014.

Now that migration has slowed, that lack of investment is a handbrake.

Activity is up. Productivity is not. Cutting interest rates cannot make workers more productive or stop young people leaving for Australia.

The external tailwinds have faded. In 2014, China imported 670,000 tonnes of whole milk powder, keeping export prices at 40-year highs.

In 2026, New Zealand faces a saturated Chinese market, shrinking demand as China ages, and a world in which tariffs matter more than market signals. The easy money is not coming back.

The biggest brake on the 2026 recovery may be political. The Opposition bloc, comprising Labour, the Greens, and Te Pāti Māori, is campaigning on big changes.

Labour proposes a capital gains tax and a “Future Fund” to channel state enterprise dividends into domestic investment. Its partners want to lift the corporate rate to 33 per cent and introduce wealth taxes on households worth more than $2 million.

Whether you welcome or fear these policies is beside the point. The uncertainty is the problem.

With the rules potentially changing, the sensible response is to wait. Boards will hesitate to approve a factory upgrade in July when the economics could shift in November. Investment freezes, dividends are paid out, decisions are postponed.

Westpac expects the Reserve Bank to begin raising rates from late 2026, shortly after voters go to the polls.

The timing could hardly be worse. The government rides cheap credit and rising house prices through the campaign, securing re-election on a feeling of returning prosperity. Then, almost immediately, the bill arrives.

If the recovery proves inflationary rather than productive, the central bank will have no choice but to tighten again.

The Reserve Bank will make its decisions on the data, not the political calendar. But voters may well be casting their ballots at the precise moment of maximum optimism.

Pointing out problems just as the mood lifts is an occupational hazard. Economists are rarely invited to parties twice.

New Zealand has survived two years of surgery. The inflation fever has broken. But stabilisation is not health.

Confidence surveys look good. But feeling optimistic is not the same as having capacity. And spending more because your mortgage dropped is not genuine growth.

Without the migration surge, the trade boom, or the reconstruction stimulus that made 2014 exceptional, the 2026 recovery rests on shallow foundations. It will be a year of grinding progress, built on cheaper mortgages rather than stronger fundamentals.

New Zealand’s new-found confidence is real. Its foundations are not.

To read the article on The Australian website, click here.