Westpac has just released its October 2025 Economic Overview which discusses the outlook for the New Zealand economy and what it means for consumers and businesses.

Overall outlook

“New Zealand’s economy has continued to run rough this year, resulting in an uncomfortable ride for households and businesses alike. But a smoother drive seems likely in the year ahead”, Westpac NZ Chief Economist Kelly Eckhold said on the release of Westpac’s October 2025 Economic Overview.

“We expect the economy will gradually strengthen over coming quarters, as high prices for key export commodities and lower borrowing costs continue to boost household incomes, and as worries about job security begin to dissipate.”

“The unemployment rate will likely nudge higher in the near-term to a peak of about 5.4%. Thereafter, we expect a downtrend in the unemployment rate to emerge in 2026 as the economic recovery gathers steam and firms begin to lift hiring.”

Interest rates and inflation

CPI inflation is currently at the top of the RBNZ’s 1-3% target band. However, it should move lower next year as food price inflation slows and prices for many other goods and services remains constrained by soft domestic demand.

“Easing inflation will give the RBNZ headroom to provide the economy with further support ahead of the important summer trading period,” noted Mr Eckhold. “We are forecasting a 25bp cut to 2.25%, but we don’t rule out a larger cut if the data flow over the next month is disappointing.”

Looking further ahead, if the economy responds to stimulatory policy settings in the way that we expect, the OCR will likely remain stable over most of 2026. “While there is plenty of water to go under the bridge, the OCR will likely begin to rise in late 2026 if the economy unfolds as expected, or perhaps sooner if inflation pressures build more quickly than we currently expect,” Mr Eckhold added.

Activity

Mr Eckhold noted that after a disappointing June quarter, the economy appears to have returned to growth in the September quarter. “Uncertainty related to US tariffs has begun to dissipate. Meanwhile. commodity prices and incomes have remained elevated and increasing numbers of mortgage holders have begun to feel the benefit of the lower mortgage rates that are now on offer. So, despite the weak start, the economy is still forecast to grow 1.2% this year, slightly outpacing population growth.”

“Looking ahead, as the full impact of monetary policy easing begins to be felt, we expect GDP growth to rise to an above-trend pace next year. Together with a lift in export volumes – including a further recovery in tourist arrivals – annual GDP growth should strengthen to 3.0% in 2026 and 3.4% in 2027”, Mr Eckhold added.

“We estimate that around 60% of the impact of OCR decreases since August 2024 have passed through to households. We anticipate another 80-90 basis points reduction in the effective mortgage rates in the next 6-9 months now the OCR is expected to settle close to 2%.”

External and primary sector outlook

Mr Eckhold said “Our discussions indicate that many exporters are coping well with the US decision to impose a 15% tariff on New Zealand’s exports, with the tariff impost partially or fully passed on to US importers in many cases.

Mr Eckhold noted “The prices received for our key primary export commodities have remained resilient. Although dairy prices are off their highs in US dollar terms, a weaker NZ dollar means that they remain consistent with our forecast farmgate milk price for this season of $10.00/kgMS. And reflecting global supply shortages, we think that elevated prices in the red meat sector will also be sustained for a while too, especially prices for beef”.

Households and businesses

“For those households with mortgages, lower mortgage rates mean that pressures on finances have continued to ease,” said Mr Eckhold. “Many other households will have welcomed the slowdown in rental price inflation over the past year” Mr Eckhold added.

“The average mortgage rate that borrowers are paying has already fallen by around 110bps, and it’s set to fall another 80bps over the coming year,” noted Mr Eckhold. “While mortgage rates have fallen sharply over the past year, the pass through of those reductions to households has been gradual due to the large number of mortgages that are fixed for a period. However, many borrowers are now rolling on to lower rates, and that process will continue into the new year with around half of all mortgages coming up for refinancing in the next six months.”

“Despite the uncertain environment, there are signs that business investment is coming out of hibernation. Commercial vehicle registrations and imports of plant and machinery are both running about 10% higher than a year ago. Lower interest rates will also help to support a lift in commercial development activity. That said, as usual, developers will likely be cautious about bringing larger projects to market until the recovery is well entrenched”, Mr Eckhold noted.

Housing market outlook

Mr Eckhold noted “The housing market has lost some forward momentum in recent months, with sales and prices moving sideways and unsold inventory remaining around decade-high levels. However, with mortgage interest rates having taken another leg lower since the RBNZ’s August pivot, we expect forward momentum to re-emerge over the key summer trading months.”

“We expect that house prices will begin to trend higher, growing around 5.4% in 2026 and 5.1% in 2027. A modest lift in prices for existing homes should support a recovery in residential construction activity later in 2026,” Mr Eckhold added.

Fiscal policy

Mr Eckhold said “Significant discipline will still be required if the Government is to achieve its target of returning the fiscal books to surplus in 2028/29. There will likely be only modest scope for the Government to spend a little more in priority areas or offer further tax incentives to encourage investment. And as the Treasury has recently reminded, even medium-term greater challenges lie ahead.”

“The sooner that medium-term pressures from an aging population are addressed, the less painful the adjustment will likely be,” added Mr Eckhold.

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