New Zealand’s economy is showing encouraging signs of recovery, even as uncertainty persists due to recent changes in US tariff policy, Westpac has revealed in its May 2025 Economic Overview.
Westpac’s May 2025 Economic Overview provides an updated outlook on the New Zealand economy and its implications for consumers and businesses.
“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,” Westpac NZ Chief Economist Kelly Eckhold said.
For Eckhold, the outlook is still overshadowed by uncertainty about the ultimate shape of US tariff policy and how the world will respond, how much this could dampen growth among some of New Zealand’s major trading partners, and the potential effects on prices for New Zealand’s key commodity exports.
Interest rates
While inflation is expected to stay in the upper half of the 1–3% target range, the Reserve Bank of New Zealand (RBNZ) is likely to lower the Official Cash Rate (OCR) to 3% in upcoming meetings.
“We expect the RBNZ to deliver a 25 bp 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 25 bp cut seems more likely than not at either the July or August meetings,” Eckhold explained.
“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.”
New Zealand exports
Despite the global uncertainty stemming from US tariff policy, prices for most of New Zealand’s key export commodities have remained strong in recent months. Westpac projects the current season’s farmgate milk price to be $10.30 per kilogram of milk solids (kgMS).
“And despite the recent rebound in the New Zealand dollar, our early forecast for the 2025/26 season remains $10.00 kg/MS. Stronger primary sector earnings will be a boon to rural communities.”
“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,” Eckhold added.
Labour market
After a decline last year, employment levels have generally stabilised in recent months. With the labour force continuing to grow, the unemployment rate is projected to rise slightly, reaching a peak of about 5.3% this year before starting to decline next year as the economic recovery strengthens and hiring increases.
Uncertainties amidst an optimistic economic forecast
While the baseline forecast was optimistic, Eckhold warned households, businesses, and financial markets to remain open to various possible economic outcomes in the 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%.”
“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.”