New Zealand's economy may be turning a corner, according to Infometrics' latest forecasts. However, recovery comes with a big caveat: fuel prices need to stay down.
The leading economics consultancy firm is now forecasting economic growth to hit a four-year high of 2.7% by the middle of next year. Chief forecaster Gareth Kiernan says to TVNZ that the outlook remains highly sensitive to overseas geopolitical events and other things.
Cheaper Diesel Brings Optimism
The key factor driving the optimistic outlook is fuel. Diesel now costs around $2.40/L, down from $3.80/L earlier this year. Kiernan says that easing has taken the pressure off businesses and will bring a cascading effect to the economy.
"The likelihood of inflation persisting above 2% a year beyond mid-2027 has reduced, meaning there is also much less pressure on the Reserve Bank to raise interest rates as far.”
"It means for businesses, there's less pressure on them to have to pass on higher fuel costs and higher transport costs to their customers, and so that all flows through into probably less need for interest rates to rise as far as we previously thought either.”
"So, put all of that together and conditions are coming together, we think, for the economy to resume the recovery that we were looking at earlier this year before the Middle East sort of blew up."
OCR Predictions
Infometrics now expects the Official Cash Rate (OCR) to reach 3.0% by the end of this year and 3.5% by the end of next year. The rise will not be the Reserve Bank reacting against inflation, but rather due to improving economic conditions and demand.
"It's nowhere near the extent of the rate rises we'd previously been thinking when inflation looked like it was going to be more persistent and problematic for the economy,” Kiernan says.
“I think the key in terms of those additional rate rises coming through potentially in 2027, if we get to 3.5%, it'll be the Reserve Bank responding to a better performing New Zealand economy, less spare capacity, better demand conditions, and therefore, not needing to provide as much stimulus to the economy.”
Consumer Spending Flat For Now
Recent data shows consumer spending was flat last month, following a 2.8% year-on-year increase in May. Additionally, apparel spending fell 4.2%, and hospitality spending dropped 1.4% YoY.
Kiernan expects stronger consumer spending growth in the second half of this year. Business confidence and investment intentions are also forecasted to be strong.
"Looking forward, the outcome of the election later this year is a key source of uncertainty, and unpredictable US actions or other international events could again undermine confidence and derail the economy's recovery.”
"Businesses and households have become fatigued from the buffeting they have endured throughout the last three years. But the current environment looks less challenging than we expected three months ago, and we are hopeful that more settled conditions prevail," he says.
Regional Remains Strong, But There Are Risks
Kiernan notes that high export returns, particularly for meat and dairy, have been contributing to regional economic growth, especially in parts of the South Island. Still, he flags this year's election and unpredictable international events as key sources of uncertainty that could slow growth.
"There was certainly a sense when we looked on a regional basis that the high export prices, good returns for farmers across meat and dairy, were flowing through and having an impact in terms of sort of broader economic indicators we were getting through particularly parts of the South Island.”
"So there was enough there to feel more confident or comfortable about that recovery than probably at any time in the previous three years."
Housing Causes “Slower Than Expected Recovery”
According to Paul Bloxham, HSBC chief economist, New Zealand's economic recovery has been slower than expected largely because the housing market has been flat for three years. In fact, many households who bought near the market peak are now sitting on properties worth less than they paid, which negatively affects the economy.
However, Bloxham echoes Kiernan’s sentiments, and expects growth to pick up from the second half of this year.
"Timely indicators are consistent with further strong growth. Although the jobs market remains fairly loose, employment typically lags the cycle, and we expect some improvement through 2026. High meat and dairy prices have supported national incomes,” Bloxham says.
"We expect a modest increase in housing prices in [the second half of] 2026 and 2027. However, the upswing in housing prices is unlikely to be enough to generate a strong 'wealth effect' for consumption.”
"We expect the RBNZ to lift its cash rate further, given it has a 'below neutral' setting in an economy in an upswing. But we see 100bp of hikes by end-2027; versus market pricing of 135bp, with housing a key factor in our more-dovish view."
Key Takeaway
New Zealand is headed towards a plausible but fragile recovery, and housing remains the weak link holding back the broader economy. For business owners, that means it's worth reviewing whether your business is properly protected against disruption, liability, or unexpected setbacks.
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