New Zealand's economy: processed grass in search of new buyers

How grass became the export staple

The first exports were taken rather than grown. Whalers and sealers hunted their quarry close to extinction, and timber, flax and kauri gum went out in what the Reserve Bank's history, following one historian, calls the "quarrying" period. Gold came next: the Reserve Bank's history records that gold made up more than half of all exports between 1861 and 1870 and 70% in 1863, the peak year, with Dunedin the city that boomed on it.

Wool was the first lasting staple, exported from the Wellington settlement from the late 1850s as whaling revenue ran out. There were a million sheep by the mid-1850s and 10 million by the early 1870s, and sheep farming spread along the east coast from Southland to the East Cape as land was bought or leased from Māori. Unrefrigerated meat and dairy could reach no further than Australia, so the rest of the sheep was boiled down for tallow.

Refrigeration changed that. The first frozen meat shipment left for Britain in 1882, and by 1890 refrigerated meat was a £1 million export industry. Farms were subdivided for meat as well as wool, and dairy farming took hold on land that had not suited sheep in Northland, the Waikato and Taranaki, moving the centre of economic activity north from its nineteenth-century base in the South Island. Dairy factories went up near the farms and freezing works near the ports. By the eve of the First World War meat and dairy made up 35% of goods exports, and pastoral products passed 90% of exports by the mid-twentieth century.

The North followed its own path for a time. Until the main trunk railway was completed in 1908, Auckland was poorly connected to the south and lived on Coromandel gold, native timber sold to Australia and kauri gum, all finite. The Eltham entrepreneur Chew Chong, born in Canton, was the first to install a freezing machine in a butter factory, and by the late 1880s he owned several butter factories and four creameries. The boom that refrigeration and recovering British demand set off in the mid-1890s lasted, by Te Ara's dating, until about 1920.

Why one buyer was the economy's risk

From the 1850s until the end of the 1960s most exports, often more than 80%, went directly to Britain. In 1928 Britain took £41 million of New Zealand's £56 million of exports. The arrangement suited both sides while British demand held. It also carried every shock in the British economy straight across, and after the First World War, as Britain's fortunes weakened through the 1920s, New Zealand's growth was slow and propped up by borrowing abroad.

The Great Depression showed how far. The Reserve Bank estimates that gross domestic product fell 17% between 1929 and 1931, and Te Ara puts output at only 75% of capacity in 1932/33, with unemployment possibly above 20%. New Zealand could not borrow abroad and its export prices collapsed. The exchange rate was devalued by 25% in 1933, and the Reserve Bank of New Zealand opened on 1 August 1934, giving the government control of monetary policy for the first time; until then banknotes had been issued by the six trading banks, four of them Australian-owned.

The Labour government elected in 1935 brought the Reserve Bank under government control and, in 1938, imposed comprehensive foreign exchange controls, which the bank administered until capital controls were finally lifted in 1984. Import licensing followed, and with it a policy of building local manufacturing behind protection. The economy that resulted was strongly regulated: interest rates were set, capital issues were controlled and exporters were sometimes required to buy inputs from high-cost domestic suppliers.

What broke the British connection

Strong growth ran from 1950 to 1966, carried by high prices for pastoral exports, and in the 1950s New Zealand's income per head was 88% of the United States', by the Reserve Bank's account. Britain began phasing out preferential quotas in 1955, and in 1961 it applied to join the European Economic Community. New Zealand signed its first free-trade agreement, with Australia, in 1965 and opened diplomatic posts across Asia and in the United States.

Two shocks followed. At the end of 1966 the auction price of cross-bred wool fell by around 40% as synthetic fibres replaced it, and it recovered only briefly in the commodity boom of 1971 and 1972; the exchange rate was devalued sharply in 1967, the year the New Zealand dollar replaced the pound. Then Britain joined the EEC on 1 January 1973, ending every trade agreement with New Zealand apart from the Luxembourg Agreement, and by the end of that year 26.8% of exports went to Britain. The oil shock of 1973 and 1974 raised the price of transport and imports at the same time.

The government's answer in the late 1970s was state-led industry. The Think Big strategy, launched in 1981 after the second oil shock, built plants that turned Taranaki gas, found from 1958 and above all in the Māui field discovered in 1968, into ammonia, urea, methanol and petrol, and expanded the steel mill at Glenbrook and the Tiwai Point aluminium smelter, open since 1971. Oil prices fell in the 1980s as the plants came on line, and public debt rose from $4.2 billion in 1975 to $21.9 billion in 1984. A wage and price freeze ran from 1982 to 1984.

How market reforms rebuilt the economy

The Labour government elected in July 1984 faced a currency crisis the day after the election. The dollar was floated on 4 March 1985. Subsidies to farmers and other industries were removed, tariffs cut, financial markets deregulated and controls on interest rates, wages and prices lifted. Wikipedia's economy article gives the cut in the top income tax rate as 66% to 33%, and its history article gives 65% to 33%. A goods and services tax was introduced at 10%, raised to 12.5% in 1989 and to 15% in 2010. Government trading departments became state-owned enterprises on 1 April 1987, required to make a profit, and shed thousands of jobs, 8,000 at New Zealand Post alone.

The adjustment was costly. The share market lost 60% from its 1987 peak. Te Ara records that GDP per person fell or stagnated in every year from 1986/87 to 1993/94, and unemployment reached 11.1% of the labour force in March 1992. Inflation, which had run at 10% to 15% a year for two decades, was brought down by the Reserve Bank Act 1989, which gave the bank independence to set monetary policy against a target agreed with the Minister of Finance. The Reserve Bank describes the formal inflation target as the first in the modern era, and by the early 1990s inflation was low.

Te Ara sets out three verdicts on the reforms without choosing between them: that all were necessary and more should have been made, that they caused needless hardship, and a middle view that many were necessary but poorly implemented and some extreme. The Labour-led government elected in 1999 took the middle view, reversing or modifying some measures while keeping the market economy. Te Ara attributes the slump to badly managed liberalisation, especially an overvalued exchange rate, as the common explanation, and records that there is no agreement on its cause.

What New Zealand produces and sells now

Stats NZ divides the economy into three parts. In the year ended March 2024, services made up 74.4% of it, goods-producing industries 20.4% and primary industries 5.2%. The primary share is small, but the primary sector still dominates exports.

The grass economy has changed inside its own categories. By the early 2000s there were about 5 million dairy cows and 4 million beef cattle; milk powder exports exceeded the combined value of butter and cheese, meat went out as cuts instead of carcasses, and pharmaceuticals were made from milk fractions and offal. Irrigation took dairying south into Canterbury at the end of the twentieth century. Manufacturing beyond food centres on aluminium, wood and paper products and metal fabrication, and pulp and paper are made at Kawerau.

In 2008, Te Ara records, tourism was the single biggest source of foreign exchange and services as a whole generated a quarter of export revenue, while base metals, fishing, forestry, horticulture and general manufacturing each earned more than wool. Electricity comes mainly from hydro, geothermal and a growing amount of wind, with generation concentrated in the South Island and the central North Island and demand in the north, around Auckland.

Who buys from New Zealand

The buyers have changed more than the goods. In 2008 New Zealand exported more by value to Australia, the United States, Japan and China, each separately, than to Britain. By 2024 the five main trading partners, China, Australia, the European Union, the United States and Japan, accounted for 63% of two-way trade, and China alone for over 30%. China buys mainly meat, dairy products and pine logs, under a free-trade agreement in force since 1 October 2008.

Australia is joined to New Zealand by Closer Economic Relations, which allows free trade in goods and most services, lets citizens of each country live and work in the other and recognises professional qualifications across the Tasman. Banking supervision is co-ordinated through a joint council. A free-trade agreement with the European Union entered into force in 2024. The Pacific islands take refined oil, building materials, medicines and food, with Fiji, Papua New Guinea, French Polynesia and New Caledonia as the main markets, and the New Zealand dollar circulates as currency in four Pacific island territories.

How the economy has moved since the pandemic

The border closed to everyone except citizens and residents on 19 March 2020, and New Zealand officially entered recession on 17 September 2020, when figures showed GDP down 12.2% in the June quarter. The economy rebounded by 14% the next quarter, and unemployment was 4.9% in December 2020. Inflation reached 5.9% at the end of 2021. From 2022 to 2024, after the last restrictions lifted, growth was low to negative as inflation, interest rates and weak spending weighed on it.

The latest Stats NZ release shows GDP up 0.2% in the June 2026 quarter and 1.7% over the year ended June 2026. In the same quarter export prices rose 3.5% and import prices 13.8%, so the terms of trade fell, and real gross national disposable income per person dropped 0.6% even as output grew. Over the longer run, Te Ara records that GDP per person has grown at 1.4% a year on average for around a century and a half, and that real incomes rose about eightfold during the twentieth century.