The annual average growth rate is projected to be just 1.1%, although it rises to 3% in 2026.
Westpac also sees the housing market continuing to improve, and is forecasting annual growth of 6% for the year.
“House sales and prices have continued to move higher in recent months as lower mortgage interest rates have increased demand among investors and existing home owners,” Eckhold said.
“House prices have increased in six of the last seven months.
“However, price gains are still very gradual for now as the housing stock available for sale has matched increased demand.”
Westpac chief economist Kelly Eckhold.
But prices should continue to rise by 6% year on year as lower interest rates are more broadly felt and when the labour market strengthens, he said.
Westpac sees the unemployment rate peaking at 5.3% for this cycle, from 5.1% currently.
“Stronger economic growth from the second half of this year should then start to bring it back towards a ‘neutral’ level of around 4.0-4.5% in the following years,” Eckhold said.
He notes that net migrant inflows have stabilised and “even picked up a little” in recent months.
“Foreign arrivals have been steady, with a growing shift in the skill mix towards professional roles. Meanwhile, departures of New Zealanders have passed their peak, though they remain well above pre-Covid levels.”
Westpac forecasts the current account deficit to fall to less than 4% of GDP this year from 6.2% of GDP in 2024, reducing a source of risk to New Zealand’s sovereign credit rating.
“Very strong export prices and restrained growth in import prices – helped by a lower oil price – are lifting New Zealand’s terms of trade to new highs," Eckhold said.
The goods balance – a deficit of 2% of GDP last year – would likely temporarily move into surplus this year, he said.
However, as the recovery broadened and import demand strengthened, the goods balance would likely return to a small deficit.
The services balance, in deficit since the start of the pandemic, is forecast to gradually return to surplus.
“Tourist spending is expected to continue its post-pandemic recovery, albeit not helped by weaker trading partner growth,” he said.
“Growth in business services exports has picked up significantly in recent quarters, helped by very strong growth in R&D revenues. The sustainability of that growth is uncertain and something we will be monitoring closely.”
Eckhold warned that downside risks from the global trade war were significant but difficult to quantify.
“Crucially, our baseline forecast is that China will successfully offset the tariff impact with more expansionary domestic policy settings, limiting the impact on New Zealand’s other major export partners in the Asia-Pacific region,” he said.
Risks around this were skewed to the downside.
“We have made a modest downward adjustment to the global outlook to reflect the tariff shock,” Eckhold said.
“However, there are risks of a deeper downturn should negotiations not go well, and especially if growth in our Asian trading partners is less resilient.”
If growth in New Zealand’s trading partner economies were to be 0.5 percentage points weaker in both 2025 and 2026, the shock would be similar to the Asian Financial Crisis but significantly smaller than the Global Financial Crisis, he said.
Westpac’s central scenario sees the Official Cash Rate (OCR) falling to 3%.
“Uncertainty about global trade is likely to persist until August at least,” Eckhold said.
“The Reserve Bank will likely carefully move the OCR gradually lower in coming months depending on how the data and situation evolves.”
After a 25-basis-point cut in May, further easing to 3% in July or possibly August was likely, he said.
“The size and impact of the global trade shock are hard to assess for now,” he said.
“New Zealand might sail through just fine or, alternatively, the recovery might be delayed and inflation could fall into the bottom half of the 1-3% target range.”
Liam Dann is business editor-at-large for the New Zealand Herald. He is a senior writer and columnist, and also presents and produces videos and podcasts. He joined the Herald in 2003.
