Westpac sees early signs of NZ economic recovery
New Zealand’s economy is beginning to show signs of meaningful recovery in 2025, with strong commodity prices and interest rate relief leading the rebound, according to Westpac.
“2025 has started pretty well. We have seen ample signs that the recovery that we expect to take hold in 2025 is in fact beginning to take hold,” said Kelly Eckhold (pictured), Westpac chief economist.
Two key factors are sustaining growth: elevated export prices, despite global concerns, and the flow-on effects of rate cuts to households and businesses.
Meanwhile, Westpac noted that government spending will remain constrained in 2025 as fiscal discipline continues, with borrowing to rise only slightly and the focus shifting to supporting recovery through monetary policy and regulatory measures.
Fiscal discipline to guide growth trajectory
The government remains focused on fiscal consolidation, with little improvement yet in deficit reduction due to weak tax revenue.
“The government continues to signal a commitment to consolidate the budget,” Eckhold said. “This means that government spending will not be a driver of growth, although regulatory policy measures should support growth elsewhere.”
The government is targeting a return to surplus by 2030 while maintaining tight fiscal settings.
Global trade tensions cast a shadow
Geopolitical uncertainty remains a threat, particularly from US-China trade tensions.
“Global growth looks weaker, and the patterns of trade will shift to reflect the new rules of the global trading system,” Eckhold said.
“But there is the risk that New Zealand’s recovery proceeds more slowly, so that the unemployment rate peaks closer to 6%.”
RBNZ likely to continue rate cuts
Monetary policy is expected to remain supportive, with the Reserve Bank likely to cut the official cash rate (OCR) to 3%.
“For now, it’s likely the RBNZ takes a methodical data-dependent approach and moves the OCR to 3% in coming months,” Eckhold said. “Policy is now stimulatory and will drive the recovery once the punches stop.”
Westpac has also revised its forecast for the OCR, now expecting a drop to 2.75% by November as global trade fears weigh more heavily on the outlook.
Domestic activity gathers steam amid external headwinds
GDP is forecast to grow by 2.7% in 2025 and 2.8% in 2026. Lower rates are unlocking household consumption and construction investment.
“An increasing number of borrowers are now rolling onto lower rates, and the boost to disposable incomes will lift consumer spending,” Eckhold said.
Despite risks, housing prices are forecast to rise by 6% per year, aided by resilient demand and moderating inflation.
Cost relief offsets weak job market
Lower mortgage rates are easing household budgets, even as employment growth lags population expansion.
“If you have an average mortgage of around $380,000, the 217bp drop in the one-year mortgage rate over the past year could reduce your minimum monthly mortgage payments by around $400,” Eckhold said.
Unemployment is expected to peak at 5.3% before improving in 2026 as growth accelerates.
Business investment on the rise
Falling interest rates are also supporting renewed capital investment despite cautious domestic demand.
“We expect to see a further lift in business investment over 2025 as the domestic economy regains momentum,” Eckhold said.
Export resilience and trade risks
High export prices are helping offset global challenges, particularly in dairy, meat, and horticulture. However, tariff tensions and weaker partner growth could impact future volumes.
“Export log prices are likely to move sideways this year... The US/China trade war could also reduce demand for logs, further stifling prices,” Eckhold said.
Currency volatility and inflation uncertainty
The NZD remains volatile amid global market shifts, while inflation is expected to linger in the upper half of the RBNZ’s target band.
“We expect inflation will drop back toward 2% over 2026,” Eckhold said.
OCR cuts to continue cautiously
The Reserve Bank will likely proceed carefully with further cuts, depending on how global risks and inflation evolve.
“After a 25bp cut in May, further easing to 3% in July or possibly August is likely,” Eckhold said. “The beginning of the return to a neutral OCR... is now more likely to be delayed until the end of 2026.”
Westpac economists warned that RBNZ may need to lower rates further than initially expected to protect against downside risks to growth.
