Westpac Economic Overview, August 2025 – Are We There Yet?

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

Overall outlook

“While uncertainty caused by developments in US tariff policy appears to have dampened activity in the June quarter, New Zealand’s economic recovery continues to unfold largely as expected”, Westpac NZ Chief Economist Kelly Eckhold said on the release of Westpac’s August 2025 Economic Overview.

“Our baseline forecast is that the economy will gradually strengthen over coming quarters, as high prices for key export commodities and lower borrowing costs boost household incomes. This should see the unemployment rate peak at 5.3% by the end of this year, before declining in 2026 and 2027.”

Mr Eckhold added, “While there are downside risks that still need to be monitored, these risks now seem less pronounced with the prospect of a full-blown trade war now unlikely. The 15% tariff on New Zealand’s exports to the US is disappointing but manageable and it remains the case that the country that will be hurt most by tariffs is the US itself”.

“CPI inflation is expected to sit near the top of the RBNZ’s 1-3% target band over the second half of this year. However, with inflation likely to move lower next year as current pressures on food prices begin to fade, we expect that the RBNZ will reduce the OCR at its upcoming August meeting by a further 25bps to 3.0%. We continue to forecast that this will mark the low point for this cycle, with the OCR likely to begin to rise in late 2026 if the economy unfolds as expected,” Mr Eckhold noted.

Activity

Mr Eckhold noted that after two quarters of growth, GDP may have tracked sideways in the June quarter. “Uncertainty related to US tariffs and sluggishness in the labour market have likely weighed on the economy in the June quarter. In addition, statistical quirks associated with seasonal adjustment mean that we expect that measured GDP growth will likely be understated in the June quarter and overstated later in the year”.

“Looking further ahead, the disposable incomes of mortgage holders are rising as they continue to refinance at the much lower interest rates now on offer. And with high export commodity prices also boosting incomes in the rural sector, and the Government’s “Investment Boost” policy encouraging the bringing forward of investment, we expect growth in domestic spending to gather pace as this year progresses. Together with a lift in export volumes – including a gradual recovery in tourist arrivals – annual GDP growth should strengthen to 2.4% this year and around 3.1% in 2026.”

Interest rates and inflation

Mr Eckhold said “Inflation is likely to approach the top of the RBNZ’s 1-3% target range over the second half of this year, reflecting rising food prices and continued large increases in administered prices (such as local council rates). While inflation is likely to fall back towards the middle of the band early next year, the RBNZ needs to be mindful of the risk that a period of higher near-term inflation could feed into inflation expectations. This points to a cautious approach to easing monetary policy further”.

Mr Eckhold continued, “We expect the RBNZ to deliver a 25bp cut in the OCR at the 20 August meeting. If the economy evolves as expected this is likely to be the low point for this cycle. However, in the near-term, the RBNZ is likely to remain an easing bias. A deeper easing cycle could still occur should the global economy underperform, or if consumers and businesses delay spending and investment.”

“While there is plenty of water to go under the bridge over the next year, the OCR will likely begin to rise in late 2026 if the economy unfolds as expected, or perhaps sooner if the economy gathers steam more quickly than expected,” Mr Eckhold added.

External and primary sector outlook

Mr Eckhold said “Recent news that the US will impose a 15% tariff on New Zealand’s exports was disappointing. But while it will prove challenging for some exporters to pass these costs onto US consumers or distributors, we expect that many exporters will be able to do so”.

Mr Eckhold continued “Despite the uncertainty and disruption created by US tariff policy, we expect New Zealand’s trading partners to grow by 2.7% this year and 2.6% next year. While this is a little slower than the pre-pandemic average, the global trading environment will still offer opportunities for exporters. Moreover, 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 $10.00/kgMS. And reflecting global supply shortages, we think that the pleasing increases in prices in the red meat sector will also be sustained,” said Mr Eckhold.

“Stronger export prices and volumes – including a continued gradual recovery in tourist inflows – should lead to a further narrowing of the current account deficit to around 4½% of GDP this year, compared with around 6% of GDP in 2024. This remains a little wider than seen prior to the pandemic”, noted Mr Eckhold.

Households and businesses

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

“To date, mortgaged households have felt just half of the expected final impact of the RBNZ’s policy easing. Around 50% of all mortgages will refinance over the next six months, further lowering the average mortgage rate paid by 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, further encouraged by the Government’s Investment Boost policy, investment spending should pick over coming quarters as businesses pursue greater productivity growth and gear up for higher levels of demand. We also expect to see strong growth in investment spending in the public sector as the infrastructure deficit is addressed” Mr Eckhold added.

Housing market outlook

Mr Eckhold noted “Mortgage interest rates have fallen significantly over the past year, driving a pickup in activity in the housing market. However, a large inventory of homes for sale – in part due to still solid levels of ongoing construction activity – has kept the market in balance. With buyers having plenty of choice, house prices have increased just 1% over the first half of this year.

Looking ahead, Mr Eckhold said “As sales continue to rise and unsold inventory is gradually worked through, we expect that annual house price growth will increase to end this year at around 3-4%. House price inflation is expected to lift further towards 6% in 2026.”

“A lift in prices for existing homes should support a recovery in residential construction activity in 2026. The resulting increases in housing supply should prevent growth in house prices running too far ahead of the growth in nominal incomes.” Mr Eckhold added.

The labour market

Mr Eckhold noted “At present demand for labour remains weak, causing the unemployment rate to rise to 5.2% in the June quarter. Given ongoing growth in the labour force, the unemployment rate is expected to edge higher to a peak of around 5.3% during the second half of this year. Thereafter, as the economic recovery gathers steam and firms begin to lift hiring, we expect a downtrend in the unemployment rate to emerge in 2026.”

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 around levels that are consistent with 2% inflation and trend productivity growth. This will provide a counterbalance to ongoing large rises in administered prices”.

Fiscal policy

Mr Eckhold said “The Government’s strategy appears to be to return the fiscal books to surplus in 2028/29. Our forecasts imply a higher tax take than projected 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 or further tax incentives to encourage investment”.

“International credit ratings agencies will be closely watching the evolution of New Zealand’s twin current account and fiscal deficits. Any lessening of the Government’s commitment to returning the books to surplus could lead to a credit rating downgrade. Should revenue surpass expectations, there would also be merit in using that to achieve a quicker return to surplus. This might also permit the Reserve Bank to offer more support to the economy” Mr Eckhold noted.

Uncertainties continue to cloud the outlook

Mr Eckhold noted “Our baseline forecast is a positive one. However, there remains uncertainty about how US tariff policy will impact global growth, inflation, export prices and financial markets, and about how households and businesses will respond to the monetary policy easing seen over the past year. Therefore, it is important to retain an open mind about how the economy will play out over coming quarters.”

“We expect to gain more clarity over the next few months as US tariff policy stabilises and as economic data begins to cast light on how trading partner growth has been impacted by these developments. Similarly, as mortgage refinancing continues, over coming months it should become clearer whether the Reserve Bank has done enough to drive economic recovery while also meeting its medium-term inflation target” concluded Mr Eckhold.

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