Economy recovery is under renewed pressure

Economic growth was already fragile prior to these developments. GDP expanded by just 0.2% in Q4 2025, slowing from 0.9% in the previous quarter. Early indicators at the start of 2026 pointed to a modest recovery, supported by stronger retail activity across a broader range of industries and emerging signs of capacity constraints. However, ongoing conflict in the Middle East is expected to weigh on near-term economic activity while adding to inflationary pressures. As a small, open economy with a high reliance on global trade and tourism, New Zealand remains particularly exposed to external shocks, increasing its vulnerability to disruptions on both growth and price stability.

Annual consumer price inflation was 3.1% in the March quarter of 2026, although the full impact of recent price pressures has yet to fully materialise. The Reserve Bank of New Zealand (RBNZ) forecasts inflation to peak at 4.3% in the September quarter before gradually returning to the 2.0% target by mid-2027. Higher petrochemical costs are expected to drive near-term inflation, with direct fuel price impacts flowing through quickly, followed by more gradual indirect effects via input costs. Business responses are mixed, with some firms passing higher costs through fuel surcharges or price increases, while others are absorbing pressures into margins amid softer demand.

The RBNZ held the Official Cash Rate (OCR) at 2.25% at its May meeting. Compared with its February Monetary Policy Statement, the RBNZ now expects a higher OCR track over the forecast period, reflecting stronger medium-term inflation pressures. While the near-term increase in inflation from higher fuel costs is expected to be partly temporary, more persistent second-round effects are anticipated. The pace of future policy tightening will depend on the balance between sustained wage and price pressures and the dampening effects of weaker economic activity.

Labour market conditions present a mixed picture. The unemployment rate edged down to 5.3% in the March 2026 quarter from 5.4%. However, declining participation and rising underutilisation suggest underlying slack persists, despite the modest improvement in headline conditions.

Overall, New Zealand’s economic outlook has become more challenging. While early signs of recovery have emerged following a prolonged period of weak activity, global uncertainty is expected to put pressure on confidence and demand, with impacts likely to intensify over the coming quarters. Further policy tightening by the RBNZ to address inflationary pressures may place additional strain on households and businesses, suggesting continued headwinds for the economy in the near to medium term.