Westpac Sees Early Stabilization Amid Domestic Weakness

The latest Westpac Economic Insight paints a nuanced portrait of New Zealand’s economy—fragile yet not entirely devoid of resilience. The labour market’s deterioration is evident, but the contraction is less severe than feared, suggesting that cyclical weakness may be bottoming. Westpac’s composite leading index, which aggregates manufacturing orders, consumer confidence, and export momentum, ticked up 0.4% in October 2025, its first increase in seven months. This stabilization coincides with a rebound in dairy export volumes, now up 6.8% year-on-year, providing some offset to domestic softness.

The interaction between external demand and domestic slack is central to the macro adjustment underway. The decline in private credit growth—now running at 2.3% annually versus 6.7% in 2022—has compressed household leverage expansion, helping to cap import demand. In turn, the current-account deficit has narrowed to -4.1% of GDP from -7.5% a year earlier. This external rebalancing is improving the country’s funding profile, with sovereign CDS spreads tightening by 12 basis points since mid-year, an outcome reflecting global investors’ relative confidence in New Zealand’s institutional consistency despite slower output growth.

Fiscal dynamics remain constrained. The government’s medium-term fiscal framework projects a deficit of 2.8% of GDP in FY2026, leaving little room for stimulus absent offsetting cuts or tax hikes. Public investment remains concentrated in infrastructure resilience and housing repair following severe weather damage in 2023–2024. These initiatives add cyclical support but risk crowding out private construction given capacity limits in the building sector. Labour productivity, stagnant for much of the past decade, is forecast to rise 0.8% in 2026—modest but directionally positive if capital deepening resumes.

Financial markets have begun to price a shallow recovery. The NZDUSD cross has appreciated 1.5% from its October low, while the 10-year NZGB yield slipped 15 basis points to 4.78%, suggesting expectations of eventual policy easing. Equity markets (NZ50) remain subdued, but dividend yields above 4% are drawing selective institutional inflows. The banking sector’s loan-loss provisions are stabilizing, implying confidence that the worst of the credit tightening cycle may have passed. Still, risk premia remain elevated for small-cap and export-dependent firms, reflecting uncertain global trade prospects.

The underlying signal is that the New Zealand economy is not collapsing but recalibrating. The re-alignment of external accounts, moderation in credit, and mild recovery in exports represent early stages of cyclical healing. Yet the structural issues—low productivity, aging demographics, high debt-to-income ratios—remain binding constraints. The next phase of recovery will hinge on whether household balance-sheet stress eases before corporate investment rebounds. Policymakers will likely maintain a neutral fiscal tone and a data-dependent monetary stance to safeguard financial credibility while cautiously nurturing growth.

If the modest upturn in leading indicators endures through Q2 2026, GDP growth could re-accelerate toward 1.5% year-on-year by late 2026. Sustained export competitiveness and a stable NZD near 0.60 USD would confirm that New Zealand has navigated the trough of its post-pandemic cycle with its macro framework intact, setting the stage for gradual normalization rather than relapse.