In December, Kiwibank economists forecast a robust recovery for New Zealand in 2026. Since then, heightened global tension and the resulting oil price shock have seen the outlook revised, with a slower return to growth now expected.
Kiwibank Chief Economist Jarrod Kerr says that while early recovery momentum has softened, the economy is showing signs of resilience.
“We expected clearer skies this year, but instead we’ve had to navigate a storm. The important thing is we’re still moving forward. The recovery hasn’t disappeared, it’s just slower than we’d hoped.”
Global headwinds slow recovery
The outlook shows the economy entered 2026 with improved momentum, including early signs of stabilising demand and easing pressure on household and business budgets.
That progress was disrupted as conflict in the Middle East drove a surge in oil prices, lifting costs and weakening demand as Kiwi pulled back on non-essential spending.
At the same time, a soft labour market and subdued wage growth continue to weigh on activity.
“Kiwi households and businesses are feeling the squeeze. There’s been some relief in places, but for many, higher costs are still front and centre. That’s holding back a stronger rebound in spending as New Zealanders continue to balance their books.”
Encouragingly, data for the March quarter highlights areas of resilience across the economy.
Nine of the 16 industry groups recorded growth. Manufacturing rose 1.9%, driven by transport equipment and machinery production. Wholesale trade lifted 2.4%, supported by machinery and equipment, while business services increased 1.1%. Business investment also rose 3.7%.
“That’s encouraging, because for the first time in a long while, the construction drag is being offset elsewhere.”
Inflation outlook remains uncertain
Inflation is expected to remain volatile in the near term, reflecting global cost pressures, before gradually easing as weak demand and subdued wage growth take effect.
“There may be short-term spikes, but the underlying trend is weaker demand and wage growth doing a lot of the work to bring inflation down.”
Kiwibank economists expect headline inflation to rise to around 4.2% in this quarter, with tradable inflation, particularly oil-related, pushing up to around 5.6%. Domestic inflation is expected to lift more modestly to around 3.3%, before easing over time.
With the outlook evolving quickly, Kerr says monetary policy will play a key role in shaping the recovery.
“We still believe this is a shock that needs to be looked through, with a focus on maintaining conditions that support the recovery and rebuild demand.”
Two scenarios – and a more positive path still in sight
Kiwibank economists outline two possible paths for the New Zealand economy.
The upside scenario assumes a “bounce back” in the domestic economy, supported by easing costs, improving confidence, and a lift in household spending and business investment.
The downside scenario reflects prolonged global disruption, weaker domestic demand, and a more challenging recovery path.
“There are still risks out there, but the positive outcome remains achievable.”
Kerr expects conditions to gain traction through 2027, with inflation easing to around 1.9% as disinflationary forces take hold: “It’s taken longer than we expected, and that’s frustrating. But we’ve weathered though periods before. There are blue skies ahead – it just might take a little longer to get there.”
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