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A Turning Point: Westpac Forecasts 2.5% Economic Growth in 2025
After a rough 2024, the New Zealand economy is setting a course for recovery this year, according to the chief economist at Westpac NZ, Kelly Eckhold.
Westpac New Zealand’s latest economic outlook report forecast 2025 to be a turning point for businesses and investors. The second half of the year will likely achieve a growth of 2.5%, followed by 3% in 2026. However, Eckhold notes that there will still be challenges ahead.
“We are now turning the corner towards growth, and there are promising signs of recovery for 2025,” Eckhold said.
Growth expected in key sectors
2024 was a tumultuous year for businesses. While inflation had reduced towards 2%, economic activity was unfavourable mid-year and remained limp throughout 2024. Eckhold suggests that economic growth and stability will come with ups and downs.
"As is often the case at turning points, conditions are mixed. Positively, we see household spending growing again, strengthening tourism, and stabilising house prices," Eckhold said.
However, Eckhold mentions that the manufacturing and construction sectors will remain weak.
New Zealand’s primary sector, dairy, is said to steadily recover in 2025. Farmers can welcome favourable conditions, and Westpac expects stronger on-farm investment in the year ahead.
"Dairy incomes look set to hit record highs in nominal and perhaps even real terms. The combination of lower interest rates and on-farm costs, a lower NZ dollar, and high world prices is serendipitous for farmers," Eckhold said.
Meanwhile, businesses and consumers can expect lower interest rates to follow the momentum of cash rate cuts we’ve seen at the end of 2024. The reduced interest rates may bring a much-needed boost to housing, household incomes, spending, and investment.
Westpac expected the housing market to strengthen in the upcoming year, with prices to rise around 7%, followed by a 5% increase in 2026. Its reports also suggest that more houses being built in the pipeline should prevent prices from increasing too much ahead of income growth.
Meanwhile, inflation is forecasted to remain between 2% and 3%, as a weak exchange rate and higher soft commodity prices threaten to keep inflation numbers high. The Reserve Bank may move conservatively after February, but further cuts to the official cash rates can be expected. Westpac predicts another 1% point cut in 2025, reducing the interest rate to 3.25%.
Better times ahead for jobseekers
Westpac’s recent data shows that the job market stabilised after employment fell by more than 1% last year. It forecasts unemployment to rise 5.4% in the middle of the year from 5.1%, with a slowing in wage growth.
Ultimately, the labour market and the peak in unemployment rates will be an important driver of how much easing will be done by the Reserve Bank.
Trade war will influence the economy
Eckhold adds that a global trade war may threaten New Zealand’s economy. Initiated by US President Donald Trump’s policy changes, the trade war presents significant risks for the worldwide economy, with uncertain outcomes for New Zealand.
"A trade war has erupted as the new US president delivers his well-signalled policy agenda. There's much uncertainty on how this will play out, but it won't be good for New Zealand," Eckhold said.
Trump recently announced 25% tariffs for all steel and aluminium imports; this was followed by earlier tariffs of 25% on Mexico and Canada and 10% on Chinese goods. Tariffs on North America have been delayed amid ongoing negotiations.
However, a weaker New Zealand dollar and lower interest rates can be expected to somewhat shield New Zealand from the effects of the trade war, with exporters set to benefit.
"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. There are likely downside risks to this sanguine views," said Eckhold.
Key takeaway
The New Zealand economic landscape is expected to change with a focus on growth and stability while adapting to new global environments. As businesses and consumers navigate these complex economic times, making strategic decisions is crucial in maintaining stability and fostering growth.
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Read the full Westpac NZ Economic Overview.