New Zealand's Economic Growth Slows in Late 2025, ANZ and Westpac Report

New Zealand’s economic momentum appears to have weakened in late 2025. ANZ reported GDP growth of just 0.2% for the December 2025 quarter, significantly below the Reserve Bank of New Zealand’s (RBNZ) 0.5% forecast. This slowdown followed a strong 1.1% growth in the previous quarter.

The main drag on growth was weak performance in construction and food manufacturing. These sectors underperformed in Q4, pulling down the overall growth figures. Westpac also revised its forecast to 0.4% for the December quarter, down from 0.6%, citing uncertainty due to developments in the Middle East.

Higher oil prices are also raising inflation concerns. Westpac now expects inflation to remain near the top of the RBNZ’s target band for most of 2026, cooling only to 2.6% by year-end. ANZ and Bank of New Zealand see inflation at 2.8% by Q4 2026, suggesting inflation may not slow as quickly as the central bank anticipated.

Why Is Growth Slowing Now?

ANZ attributes the slowdown to weak demand in construction and food manufacturing, which offset stronger performance in services and agriculture. The services sector, driven by tourism and lower interest rates, is propping up growth despite challenges in goods-producing industries.

Westpac also pointed to seasonal factors and the clarity of the December quarter report. However, it noted that the broader economic outlook has become clouded by geopolitical risks. The conflict in the Middle East has introduced uncertainty, with oil prices spiking and affecting inflation expectations.

How Might the RBNZ Respond?

The RBNZ previously projected inflation would decline to 2.3% by year-end 2026. But with higher inflation risks, market expectations are shifting. Investors are now pricing in a 25 basis point rate hike in September and a further increase in December.

While the RBNZ can absorb some inflationary shocks, it is more concerned about second-round effects, such as higher freight costs and airfares. Air New Zealand, for example, is considering fare increases due to rising jet fuel prices. Such developments could force the RBNZ to act sooner than expected.

Governor Anna Breman has stated her goal is to bring inflation to the middle of the RBNZ’s 1-3% target band. However, if inflation stays above 2.5% for most of 2026, this may become harder to achieve. Breman’s April 8 rate review and March 24 speech will be closely watched by the market.

What Are Analysts Watching Next?

Economists are monitoring the pace of inflation and the resilience of the services sector. While tourism and lower interest rates have supported demand, construction and manufacturing weakness is affecting employment and confidence.

The current account deficit remains stable at 3.5% of GDP, which is a positive sign for New Zealand’s external finances. However, if global funding costs remain high, this could pose challenges for policymakers.

Market participants will also be watching for signs of a broader slowdown. A weak construction sector could impact jobs and consumer sentiment. Meanwhile, food manufacturing struggles might hint at export challenges. If the goods-producing sectors continue to lag, the economy could face uneven growth, making policy decisions more complex.