New Zealand’s economy is set for a stronger year in 2025, with Westpac projecting a 2.5% GDP growth rate, followed by a further acceleration to 3% in 2026. The bank’s latest economic report indicates a turning point after a challenging 2024, driven by lower interest rates, a resilient primary sector, and a recovering housing market. Still, uncertainty looms as global trade tensions pose potential risks.
Signs of Economic Recovery
Westpac’s chief economist, Kelly Eckhold, said the country was moving past last year’s economic struggles with encouraging signs across key sectors. “As is often the case at turning points, conditions are mixed,” he said. “Positively, we see household spending growing again, strengthening tourism, and stabilising house prices.”
New Zealand’s economic dip in 2024 was attributed to high interest rates and global economic headwinds. However, with inflation moderating towards the Reserve Bank’s target range of 2–3%, the economy appears to be improving. Westpac expects the second half of 2025 to show stronger momentum, laying the foundation for sustained growth into 2026.
Interest Rate Cuts to Boost Growth
A significant factor behind the expected economic recovery is the Reserve Bank’s anticipated interest rate cuts. Westpac forecasts a one percentage point reduction in the Official Cash Rate (OCR), bringing it down to 3.25% in 2025. Lower borrowing costs are expected to support household spending, business investment, and the housing market.
The bank also noted that net migration would likely remain higher than previously expected, providing additional support to domestic demand. However, some sectors, such as manufacturing and construction, are expected to continue struggling in the short term.
Strong Primary Sector and Tourism Recovery
The agricultural sector remains a cornerstone of New Zealand’s economy, and Westpac’s forecast suggests it will play a crucial role in driving growth. Dairy incomes are expected to reach record highs in nominal terms, benefiting from a combination of lower interest rates, reduced on-farm costs, a weaker New Zealand dollar, and strong global commodity prices.
Meanwhile, the tourism industry is rebounding as international travel recovers. Increased visitor numbers and government initiatives to support the sector are expected to boost service industries, adding further momentum to economic growth.
Housing Market Gains
The housing market is also projected to recover, with Westpac predicting a 7% rise in house prices in 2025, followed by a further 5% increase in 2026. The combination of lower interest rates, stabilising economic conditions, and continued housing demand is expected to drive price growth.
However, the bank noted that increased housing supply would help prevent runaway price inflation, keeping price growth in line with income levels.
Risks on the Horizon
Despite the positive outlook, Westpac has warned of risks that could derail economic recovery. A major concern is the impact of escalating global trade tensions, particularly following the policy shifts of the newly elected U.S. president. Eckhold described the situation as a “trade war” with significant uncertainty over how it could affect New Zealand’s exports and overall trade balance.
“Looking ahead, our baseline view is for gradual recovery assuming trade uncertainties don’t disturb either economic activity or our terms of trade too much,” he said. “There are likely downside risks to this sanguine view.”
Unemployment and Inflation Trends
While the job market is showing signs of stabilisation, unemployment is expected to rise to 5.4% in mid-2025, up from the current 5.1%. Wage growth is also slowing, which could temper household spending despite lower borrowing costs.
Inflation is projected to remain within the 2–3% range, influenced by a weaker New Zealand dollar and rising soft commodity prices. While easing inflation is a positive development, it remains a factor the Reserve Bank will need to monitor closely when deciding on future interest rate cuts.
Outlook? Cautious Optimism
Westpac’s report paints a cautiously optimistic picture for New Zealand’s economy in 2025. While growth is expected to rebound, significant risks remain, particularly on the global stage. The balance between supportive domestic factors—such as lower interest rates, a strong primary sector, and a recovering housing market—and external threats like trade disruptions will determine the economy’s trajectory in the coming years.