NZ economy to dodge recession but faces ‘rocky’ year – Westpac

Source: Radio New Zealand

New Zealand will avoid slipping into recession, but faces a difficult year of weak growth, rising unemployment and higher interest rates as global energy prices surge, according to Westpac’s latest Economic Overview.

The bank said the Middle East conflict had driven a sharp rise in oil and fuel costs, hitting households and businesses and forcing a significant downgrade to the economic outlook.

“The outlook for the economy has changed materially in recent months,” Westpac chief economist Kelly Eckhold said.

“While we are not forecasting a recession, the economy has been knocked off course by a surge in fuel prices and heightened global uncertainty.”

Westpac now expected economic growth of around 1.5 percent in 2026, describing it as another year of “sub par” performance as the recovery loses momentum.

“We don’t expect a recession right now. Rather the view is that the Iran war will merely cause a pause in the economic recovery,” Eckhold said

The bank expected stronger growth to return from 2027, but warned the outlook was highly uncertain and depended heavily on how long the conflict lasted.

Inflation surge and higher interest rates

A key impact of the oil shock was a renewed lift in inflation, with higher petrol prices flowing through into a broad range of costs.

“The spike in fuel and other costs is driving a renewed lift in inflation pressures across the economy,” Eckhold said.

Westpac expected annual inflation to rise into the 4 percent to 5 percent range over the coming year, remaining above the Reserve Bank’s target band until well into 2027.

That was likely to force the Reserve Bank to begin raising interest rates.

“Interest rates are set to rise – it’s a question of ‘when,’ not ‘if’ hikes occur,” the bank said.

Westpac expected the Official Cash Rate to climb to around 3 percent by the end of 2026, with more increases in 2027.

Households squeezed, spending slows

Rising living costs were expected to weigh heavily on households over the coming year.

Fuel prices had jumped sharply since the conflict began, adding to earlier increases in essentials such as food and electricity.

“Cost of living pressures have intensified,” the bank said, warning that household finances were coming under renewed strain and spending growth was set to slow sharply.

Higher borrowing costs would also add to the pressure to household budgets, with mortgage rates likely to increase as interest rates rose.

Businesses were expected to respond to rising costs and uncertainty by pulling back on hiring.

“Businesses are likely to shelve hiring plans while oil prices and uncertainty are elevated,” Eckhold said.

Westpac expected the unemployment rate to rise to around 5.6 percent over the coming year as hiring growth stalled.

Housing and investment hit

The housing market, which had shown signs of recovery earlier in 2026, was expected to lose momentum.

House prices were forecast to be flat to slightly lower over the year, reflecting weaker confidence and rising interest rate expectations.

“The housing market is unlikely to be a driver of growth for the coming year or so,” Eckhold said.

Business investment and construction were also expected to slow, as firms delay decisions amid heightened uncertainty.

Outlook depends on conflict

Westpac said the next steps for the economy would depend heavily on how events unfolded in the Middle East.

A prolonged conflict would mean weaker growth and more persistent inflation, while a faster resolution would ease pressures sooner.

“The economy is navigating rocky waters, with subdued economic growth, a soft labour market and high inflation,” the bank said.

“Firms need to manage what they can control,” Eckhold said.

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– Published by EveningReport.nz and AsiaPacificReport.nz, see: MIL OSI in partnership with Radio New Zealand