BUMPS IN THE ROAD TO ECONOMIC RECOVERY

Since the last Overview in May, which expressed encouraging signs in GDP growth and business confidence, Westpac economists are reporting that economic growth in New Zealand has taken a step down in the middle part of the year, and both household demand and business sector conditions are soft. There is some growth in key measures, but less than had been hoped for, especially in urban centres.

Writing in the foreword to the August Overview, Kelly Eckhold, the bank’s Chief Economist, notes: "Growth in 2025 is projected at 2.4%. Lower interest rates and strong export returns are continuing to support demand. But uncertainty associated with the trade war, ongoing cost-of-living pressures and the still slow passage of past OCR cuts into household budgets have been weighing on activity. Inflation will remain elevated through the next six months, [and] there’s a reasonable expectation that inflation will ease in 2026. The timing and degree of that decline remain uncertain. Very low outcomes are unlikely at this stage.

"The Reserve Bank is expected to cut the Official Cash Rate to 3% in August, but the picture beyond that is less clear. It’s probable that 3% will mark the low point in the current cycle provided that activity picks up as expected. The speed and strength of the recovery will determine whether further policy support is needed. For now, we continue to ask ourselves: 'Are we there yet?'"

How grim is the outlook?

It's all still sounding "pretty grim", as Auckland Business Chamber chief executive and former National Party leader Simon Bridges recently said about the high rate of unemployment in Auckland.

However, the August Overview does contain some optimism that the end of the long road to economic recovery is in sight. The key factors explored in the Overview tell us that:

• Growth is set to trend higher later this year as the full effects of interest rate reductions ripple through the economy.
• Around half of all mortgages will come up for repricing over the next six months and borrowers could see large reductions in their borrowing costs.
• It is estimated that almost half of the expected impact of the past year’s OCR cuts are yet to pass through to households.
• Stronger export returns mean that rural regions, especially those with large dairying sectors, are seeing strong growth in incomes and spending.
• The labour market remains soft, with the unemployment rate reaching 5.2% in the June quarter (good news for franchisors who are seeing increasing numbers of enquiries from people looking to buy a business - instead of queuing up with hundreds or thousands of other job applicants).
• Net migration remains modestly positive, expected to rise to a net inflow of 37,000 in 2026 thanks to initiatives like the Parent Boost Visa. Again, good news for franchisors as immigrants often take a strong interest in business investment opportunities.
• Businesses remain upbeat about their prospects for the months ahead, even as they acknowledge the current situation remains tough.
• The Government's new Investment Boost scheme, allowing accelerated depreciation on all new business assets is expected to not just improve the immediate and forward finances of many large and SME businesses, but also lift the level of GDP by around 0.5% after five years.
• Tax revenue this year is expected to slightly outperform the Budget forecasts, resulting in around $10bn of that revenue being fed back into the economy through higher discretionary and capital spending from Budget 2026 onwards. It is also possible that some or all of that revenue could be deployed in the form of tax reductions instead.
• Increased US tariffs are no longer expected to significantly affect overall export returns, but could be material for more competitive segments, such as wine.
• Offsetting a likely widening of the trade goods deficit, the services balance should gradually move into surplus, driven by an ongoing slow recovery in international tourist arrivals and growth in exports of business services.
• Inflation is set to rise to around 3% through the latter part of 2025 but is then expected to drop back toward 2% over 2026 as recent increases in food prices ease. Inflation in interest rate-sensitive parts of the domestic economy has been cooling already.

The full 25-page Westpac Economic Overview can be downloaded in pdf form here.