New Zealand’s economic recovery is now expected to be delayed until 2027, as escalating conflict in the Middle East shows how heavily exposed modern economies are to global instability and energy shocks.
New analysis from ASB pointing to ongoing global instability as a key reason the turnaround will not materialise until next year.
The bank has joined other local forecasters in revising expectations downward, delivering cuts to growth projections while warning of higher inflation, weaker investment, reduced household consumption, and rising unemployment. These signal mounting strain on both employers and working households.
ASB chief economist Nick Tuffley noted that prior to the Middle East conflict and the resulting surge in oil prices, the economy had been on track for a modest recovery over the year. That outlook had been supported by lower interest rates and easing inflation pressures—conditions that were beginning to restore some stability.
However, those gains have now been undermined.
“With the new headwinds of higher fuel prices and potential fuel scarcity, that recovery is now unlikely to take place until 2027.”
The economy is expected to contract in the three months ended June, while annual growth has been sharply revised down to 1.3% from a previous forecast of 2.9%. Higher fuel prices are hitting consumer spending, disrupting tourism, and discouraging business investment.
Inflation is also projected to rise, reaching 4.2% in the June quarter before gradually easing to the high 3% range early next year.
Tuffley emphasised that much depends on how long the conflict lasts, acknowledging the uncertainty by comparing it to “how long is a piece of string.” While a quicker resolution could improve the outlook, he warned that for now, both households and businesses must brace for a more difficult and uncertain period.
ASB is currently forecasting elevated energy prices through to September.
The situation also presents a challenge for the Reserve Bank (RBNZ), which must now balance higher inflation and rising inflation expectations against weakening economic growth. Tuffley noted that RBNZ governor Anna Breman has recently signalled the central bank would be inclined to “look through” the immediate short-term inflation impact.
Despite the uncertainty, ASB is maintaining its pre-conflict forecast that the official cash rate is likely to be raised by the end of the year. Tuffley pointed out that while the RBNZ had been relying on slack in the soft economy to counter inflation pressures, this had not yet materialised. Inflation stood at 3.1% at the end of last year, already a challenging starting point before the added strain of rising oil prices.