US tariff uncertainty clouds New Zealand’s economic outlook - Westpac

US President Donald Trump imposed 15% tariffs on New Zealand exports to the US. Photo / Getty Images

Uncertainty remains around how US President Donald Trump’s tariffs will impact New Zealand’s economic recovery, Westpac chief economist Kelly Eckhold says.

But with the prospect of a full-blown trade war now unlikely, the economy is expected to strengthen in the second half of the year, according to Westpac’s latest Economic Overview.

Eckhold said New Zealand’s economic recovery continues to unfold largely as expected.

“Our baseline forecast is a positive one … that the economy will gradually strengthen over coming quarters, as high prices for key export commodities and lower borrowing costs boost household incomes.”

But tariff uncertainty, ongoing cost of living pressures and the slow pass-through of Official Cash Rate (OCR) cuts into household budgets have been weighing on activity, he said.

Eckhold said the decision to impose 15% tariffs on New Zealand’s exports to the US is disappointing but manageable.

“While there are downside risks that still need to be monitored, these risks now seem less pronounced with the prospect of a full-blown trade war now unlikely.

“It remains the case that the country that will be hurt most by tariffs is the US itself.”

Eckhold said annual Gross Domestic Product (GDP) growth should strengthen to 2.4% this year and around 3.1% in 2026, boosted by households’ rising disposable income, a lift in export volumes and a gradual recovery in tourist arrivals.

“Uncertainty related to US tariffs and sluggishness in the labour market have likely weighed on the economy in the June quarter. In addition, statistical quirks associated with seasonal adjustment mean that we expect that measured GDP growth will likely be understated in the June quarter and overstated later in the year,” he said.

Households with mortgages would continue to see the benefits of a falling OCR, Eckhold said.

“To date, mortgaged households have felt just half of the expected final impact of the RBNZ’s policy easing.

“Around 50% of all mortgages will refinance over the next six months, further lowering the average mortgage rate paid by households. Together with growth in rural incomes and growing consumer confidence as the labour market stabilises, this should provide a boost to household spending.”

Eckhold said he expected the unemployment rate to peak at 5.3% by the end of this year, before declining in 2026 and 2027.

“At present, demand for labour remains weak … as the economic recovery gathers steam and firms begin to lift hiring, we expect a downtrend in the unemployment rate to emerge in 2026.”

Inflation was likely to approach the top of the Reserve Bank’s (RBNZ) 1-3% target range over the second half of the year, reflecting rising food prices and large increases in administered prices (such as local council rates), Eckhold said.

“While inflation is likely to fall back towards the middle of the band early next year, the RBNZ needs to be mindful of the risk that a period of higher near-term inflation could feed into inflation expectations.

“This points to a cautious approach to easing monetary policy further”.

Eckhold said Westpac expects the RBNZ will deliver a 25-basis-point cut to the OCR next week, having kept the cash rate on hold in July at 3.25%.

“If the economy evolves as expected, this is likely to be the low point for this cycle.

“A deeper easing cycle could still occur should the global economy underperform, or if consumers and businesses delay spending and investment.

“While there is plenty of water to go under the bridge over the next year, the OCR will likely begin to rise in late 2026 if the economy unfolds as expected, or perhaps sooner if the economy gathers steam more quickly than expected.”

Cameron Smith is an Auckland-based business reporter. He joined the Herald in 2015 and has covered business and sports. He reports on topics such as retail, small business, the workplace and macroeconomics.