Political uncertainty may spoil growth party as election nears

By Fergus McDonald

Originally published on The Post on December 26, 2025

Fergus McDonald is head of bonds and currency at asset manager Amova.

ANALYSIS: Few things fill people like us – those who make a living from working with the markets – with as much dread as being proved wrong. And yet as each year comes to a close, we find ourselves willingly taking up the invitation to predict what may, or may not, lie ahead over the next 12 months.

Last year, it was my colleague, Ian Bellew, who considered a fairly grim outlook for 2025 with his glass half empty. But as I now look forward, after what has been a lengthy economic drought, my glass has been replenished to over half full - and I see an increasing number of reasons to be optimistic about New Zealand’s economic prospects. Granted, my outlook for financial markets is far less certain, for reasons I’ll expand on later. But for now, let’s concentrate on the positives.

Fergus McDonald, head of bonds and currency at Amova, says the interest rate piece is helping boost the economy right now - but there will be other factors to consider in 2026.

Low interest does not mean boring

Interest rates remain the single most effective tool to deliver an economic recovery. And that tool is very sharp at present. With rates set to stay low through 2026, thereby reviving our desire to spend, consume and invest, we can predict with some certainty that recovery will happen and happen quite quickly. But rates won’t stay low forever, so within the mists of the crystal ball we can see the prospect of rates rising again – or at least markets pricing in the possibility of rates rising again – perhaps even before 2026 is out.

So what does this mean for you – both as a consumer and an investor? With the caveat that this is not financial advice, if you are a borrower and/or mortgage holder, then you should naturally consider extending the fixed term of your loan over the first half of the year. And while borrowers look to ‘go long’ to avoid the impact of rising rates, bond investors should start to think about reducing the duration of their bond portfolios.

Interest rate changes can also have a meaningful impact on our share market here. The prospect of a rates bounce leading into 2027 will hold back sectors sensitive to these, such as commercial property, which has been a clear beneficiary of this year’s rate drops. However, a more robust economy should see higher demand for goods and services translate into improved corporate earnings and profitability. Therefore, the share market (and investment in general) may see a rotation out of companies that have benefited from falling interest rates and a low New Zealand dollar towards more growth and cyclical companies operating in the building materials, tourism and retail sectors.

Just a quick word on our dollar here, which like our economy has been a global under-performer over the last few years. A reversal of domestic economic fortune should be mirrored by rebounding currency strength, therefore investors in global markets should begin to consider increasing the hedging of foreign assets to the NZD as the trend towards a lower NZ dollar starts to reverse.

More helping hands

Beyond the critical importance of interest rates to economic and market performance, there will be other influential factors at play this next year. Incomes in most export sectors remain elevated and should help to stimulate higher levels of spending and investment. And if we were to create a “Tractor Index” to measure the confidence in the agricultural sector right now, it would be showing a healthy move higher.

The Government – and indeed the whole political arena – will also be an important player. After helping to depress consumer optimism by reining in their spending and notably by slashing the number of state employees, the Coalition Government is now trying to turn the ship around by bringing forward maintenance and build expenditure on education and health infrastructure. More flexibility in immigration settings and tweaks to help the international student industry will be growth friendly, so too the greater focus on tourism and encouraging major events to this country. All of this should support a more vibrant New Zealand over 2026 and 2027.

Polling to press pause

However, obscuring the light at the end of the tunnel – or at least the speed with which we ride into it – is the spectre of an election at the back end of the year.

Given the divergent views on policy focus, the only thing we can say with certainty about the election is that it will see delays in or possibly postponement of investment and spending intentions until the make-up of the next (likely coalition) Government is known.

When we analyse why New Zealand’s investment and therefore growth cycles are not as sustained as many other nations’ – and why we are all the poorer for it – this three-yearly electoral cycle of uncertainties looms large as a contributing reason. If we do not extend the parliamentary term to create more planning certainty, then bi-partisan support among the major political players should be an even higher priority in areas crucial to New Zealand’s prosperity.

Let’s not let debt become our Albatross

Having begun this article talking about a half-full glass, that also means I’ve not drunk in enough to get too giddy on our future prospects – and it’s worth considering this sobering thought. As of the 2025 financial year, New Zealand’s net crown debt is about 43% of GDP. The cost of servicing this is $9 billion each year: money that is going into the pockets of NZ’s financiers rather than to doctors, nurses, teachers et al. And Treasury has warned that this situation could get much worse.

Under current fiscal settings the debt number could rise to about 200% of GDP, and if this eventuates, then the cost of servicing this will become crippling. It’s therefore incumbent on all of us to think about how we can grow our personal and thereby collective wealth to support the country’s sustainable growth and avoid this from happening. The good news here, is that it’s not as difficult as it sounds. Here are just some ideas, for individuals, businesses and legislators.

Change from thinking about saving to start thinking about investing; and if appropriate for you, think about switching to a more growth-orientated KiwiSaver fund. Plus, don‘t just invest in the markets: invest in yourself to increase your skillset and with it your income-earning potential.

Be innovative! AI and technology more generally offer inquisitive and imaginative minds the opportunity to develop globally relevant applications and businesses from right here in Aotearoa. Rocket Lab and Zuru have been exceptional pioneers, with others now following boldly in their footsteps.

And let’s play to our strengths. As a country we are great at agriculture in all its varied forms. Let’s think about increasing irrigation schemes to bring more land into production, which will lead to more local employment opportunities and the potential for higher export income.

When we look back over the last few years, it’s easy to be negative. But a positive mindset leading to meaningful action can contribute to success in 2026 and beyond.