Near-term growth outlook softens; OCR cuts close to ending
“Are we there yet?” That’s the question Westpac chief economist Kelly Eckhold (pictured) is asking as the bank projects 2.4% growth in 2025 and 3.1% in 2026 – figures that suggest a recovery is underway, but far from complete.
Lower interest rates and strong export returns are helping to support demand, but uncertainty from the trade war, cost of living pressures, and a slow pass-through of past OCR cuts into household budgets are still weighing on activity.
“Uncertainty associated with the trade war, ongoing cost of living pressures and the still slow passthrough of past OCR cuts into household budgets have been weighing on activity,” Eckhold said. “The target for returning the budget to surplus remains 2028/29 and so government spending is unlikely to be a key driver of growth.
“We suspect any unexpected tax windfalls will be spent in budget 2026 rather than saved. There’s a non-trivial risk that credit rating agencies might stop giving us the benefit of the doubt, increasing the stakes for fiscal management in coming years.”
Global risks easing, export demand steady
Eckhold said the global outlook was less bleak than feared earlier this year, with worst-case trade war scenarios avoided.
“The US tariff framework now looks clearer. New Zealand’s 15% tariff is disappointing but manageable and it remains the case that the country that will be hurt most by tariffs is the US itself,” he said. “Despite the volatility, exporters have weathered the storm, and in many cases are successfully passing on tariff costs to their customers.”
High export commodity prices, particularly dairy and meat, continue to underpin rural incomes and spending, while the government’s “Investment Boost” policy is expected to lift domestic investment.
Inflation to stay elevated into 2026
Inflation is expected to remain close to the top of the 1-3% target band over the next six months before easing in 2026.
“The timing and degree of that decline remain uncertain. Very low outcomes are unlikely at this stage,” Eckhold said.
While cost pressures remain, Westpac expects an eventual pick-up in the labour market to support household spending, with around half of all mortgages due to reprice in the next six months – many onto rates around 200bps lower than a year ago.
OCR expected to bottom at 3%
Westpac anticipates one final 25bp cut from the Reserve Bank in August, taking the OCR to 3%.
“It’s probable that 3% will mark the low point in the current cycle provided that activity picks up as expected,” Eckhold said. “The speed and strength of the recovery will determine whether further policy support is needed. For now, we continue to ask ourselves: ‘Are we there yet?’”
Recent data has reinforced the case for more monetary easing.
The June quarter unemployment rate held at 5.2% – matching its COVID-era peak and the highest since 2016 – while labour force participation fell to a four-year low. Wage growth slowed to just 2.3% annually in the private sector, its weakest in four years, with Westpac calling it a “Goldilocks” zone that supports further easing. Inflation expectations remain anchored around 2-2.5%, reducing pressure on the RBNZ to hold rates steady.
Housing outlook: demand rising, prices steady
House sales are running about 17% higher year-on-year, but prices remain up just 1% year-to-date as increased supply caps gains. Westpac forecasts 3-4% house price growth in 2025 and 6% in 2026, with stronger gains likely in late 2025 as inventory tightens.
Fiscal discipline remains key
Westpac’s forecast assumes the government will maintain a small surplus by 2028/29, with net debt peaking at around 44% of GDP in 2026/27. However, Eckhold warned that fiscal slippage could risk a sovereign ratings downgrade.
Read the full Westpac economic report for more information.
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