Westpac Economic Overview, May 2025 – Rolling With The Punches

Press Release – Westpac New Zealand
The New Zealand economy continues to show pleasing signs of recovery, notwithstanding uncertainty created by developments in US tariff policy, Westpac NZ Chief Economist Kelly Eckhold said on the release of Westpacs May 2025 Economic Overview.
Westpac has just released its May 2025 Economic Overview which discusses the outlook for the New Zealand economy and what it means for consumers and businesses.
Overall outlook
'The New Zealand economy continues to show pleasing signs of recovery, notwithstanding uncertainty created by developments in US tariff policy', Westpac NZ Chief Economist Kelly Eckhold said on the release of Westpac's May 2025 Economic Overview.
'While there are downside risks that need to be carefully monitored, our baseline forecast is that the economy will gradually strengthen over coming quarters, supported by lower borrowing costs and much improved prices for key export commodities.'
Mr Eckhold noted that the outlook remains clouded by uncertainty regarding the final form and global response to US tariff policy; the extent to which that would depress growth in some of New Zealand's key trading partners; and the impact on prices obtained for our key commodity exports. 'A downside scenario would moderate the recovery and could see the unemployment rate approach 6%,' said Mr Eckhold.
'We expect that the RBNZ will carefully balance downside risks to activity with the need to ensure that inflation settles close to the midpoint of the 1-3% target range. We forecast two more 25bps cuts to the OCR to a low point of 3% in the September quarter. The OCR will likely begin to rise in late 2026 if the economy unfolds as expected,' Mr Eckhold noted.
Activity
Mr Eckhold noted that indicators suggest that the economy has continued to find its feet. 'After two quarters of contraction in the middle of last year, a second quarter of positive GDP growth is estimated to have occurred in the March quarter,' said Mr Eckhold.
'Looking ahead, the disposable incomes of mortgage holders are now beginning to rise as they refinance at the much lower interest rates now on offer. And with much-improved commodity prices also boosting incomes in the rural sector, we expect growth in domestic spending to gather pace as this year progresses. Together with a lift in export volumes – including a further recovery in tourist arrivals – annual GDP growth should strengthen to 2.7% this year and around 2.8% in 2026.'
Interest rates and inflation
Mr Eckhold said that while inflation was likely to remain in the upper half of the 1-3% target range, the RBNZ was likely to reduce the OCR to 3% over coming meetings. 'We expect the RBNZ to deliver a 25bp cut in the OCR at the 28 May meeting. And given that uncertainties surrounding the global economic outlook are unlikely to quickly dissipate, a further 25bp cut seems more likely than not at either the July or August meetings.'
Mr Eckhold noted that this is likely to be the low point for this cycle, with the RBNZ expected to be cautious as it seeks to support the economic recovery while not reigniting inflation pressures. 'While there is plenty of water to go under the bridge over the next 18 months, the OCR will likely begin to rise in late 2026 if the economy unfolds as expected,' Mr Eckhold added.
External and primary sector outlook
'Despite the global uncertainty created by US tariff policy, the prices received for most of NZ's key export commodities have remained resilient in recent months. We reaffirm our forecast for the current season's farmgate milk price at $10.30/kgMS. And despite the recent rebound in the New Zealand dollar, our early forecast for the 2025/26 season remains $10.00kg/MS. Stronger primary sector earnings will be a boon to rural communities,' said Mr Eckhold.
'Stronger export prices and volumes – including a continued recovery in tourist inflows – should lead to significant narrowing of the current account deficit to around 3½% of GDP this year, compared with around 6% of GDP in 2024. In combination with the Government's fiscal strategy, this should take some downside pressure off New Zealand's sovereign credit rating', added Mr Eckhold.
Households and businesses
'The squeeze on households' finances has begun to ease,' said Mr Eckhold. 'Around 80% of all mortgages will reprice at lower interest rates over the next 12 months, boosting disposable incomes for those households. Together with growth in rural incomes and growing consumer confidence as the labour market stabilises, this should provide a boost to household spending,' Mr Eckhold noted.
'Last year's downturn and growing spare capacity in the economy caused businesses to scale back investment spending. However, investment spending should begin to pick up later this year as businesses gear up for higher levels of demand. We also expect strong growth in investment spending in the public sector as the infrastructure deficit is addressed' Mr Eckhold added.
Housing market outlook
'Mortgage interest rates have fallen significantly over the past year, driving a pickup in activity in the housing market. While a large inventory of homes for sale is presently constraining growth in house prices, we expect that annual house price growth will begin to lift towards 6% as that inventory is gradually worked through.' Mr Eckhold commented.
'A lift in prices for existing homes should support a recovery in residential construction activity from late this year. The resulting increases in housing supply should prevent growth in house prices running too far ahead of the growth in nominal incomes.'
The labour market
Mr Eckhold noted 'After declining last year, employment levels have broadly stabilised in recent months. Given ongoing growth in the labour force, the unemployment rate is expected to edge higher to a peak of around 5.3% this year, before beginning to trend down next year as the economic recovery gathers steam and hiring picks up.'
Mr Eckhold added, 'Given the slack that has emerged, wage and salary growth in the private sector has moderated significantly over the past year and is now close to levels consistent with 2% inflation and trend productivity growth.'
Fiscal policy
Mr Eckhold said 'Government spending is expected to shrink relative to GDP, as the Government seeks to deliver on its strategy of returning the fiscal books to surplus. While it won't be a direct driver of growth, there is much the Government can do though regulatory policy and infrastructure investment to help unlock the growth potential of the economy.'
Mr Eckhold added, 'Our forecasts imply a higher tax take than projected in the HYEFU, and almost certainly a higher tax take than will likely be unveiled in Budget 2025. If our forecasts play out, there may be scope for the Government to achieve a return to surplus while still spending a little more in priority areas.'.
Significant uncertainties continue to cloud the outlook
Mr Eckhold noted 'While our baseline forecast is a positive one, households, businesses and financial markets need to keep an open mind about how the economy will play out over coming quarters.'
'There remains significant uncertainty about the final form of US tariff policy and how this will impact global growth, inflation and financial markets. A downside scenario would moderate the recovery and could see the unemployment rate approach 6%,' said Mr Eckhold.
'We expect to gain more clarity over the next few months as trade negotiations take place and as economic data begins to cast light on how trading partner growth has been impacted by recent developments. There also continue to be other geopolitical risks that if realised could affect the economic outlook,' concluded Mr Eckhold.

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