From 3.3% to 1.9% in six weeks
In February, Westpac chief economist Kelly Eckhold was the market’s biggest optimist. He projected 3.3% GDP growth for 2026, unemployment falling below 5% in the second half, and inflation moderating nicely. “After a rocky few years, the New Zealand economy looks to be on much firmer footing in 2026,” he said.
By late March, that forecast was gone. Westpac now expects full-year GDP growth of just 1.9%, including a 0.4% contraction in the June quarter as fuel costs crush household spending. Unemployment is forecast to peak at 5.6% by mid-year before easing only marginally to 5.4% by December.
That is a 40% haircut to the growth number. For any business that made hiring, investment, or pricing decisions based on the February outlook, the ground has shifted underneath them.
Fuel did the damage and inflation will finish it
The Iran conflict and resulting oil price shock is the proximate cause. New Zealand imports all of its refined fuel, making it uniquely exposed. ASB chief economist Nick Tuffley put it plainly: “We import all of our refined fuel, so sustained increases in oil prices quickly feed into higher transport costs, higher inflation and weaker household spending.”
The Q1 2026 CPI data already showed the direction. Annual inflation held at 3.1%, with petrol up 3.5% in the quarter and electricity up 12.5% annually. But that was the calm before the storm. RBNZ governor Anna Breman has forecast a 4.2% annual rate for Q2, while Westpac sees inflation peaking at 4.1% in mid-2026 and staying above 3% until early 2027. That peak would exceed Treasury’s previous worst-case scenario of 3.7%.
Eckhold described the confidence mechanism clearly: “The Iran War will have damaged confidence in the household and business sectors and will be prompting changes in spending and investment plans given people have no real idea on when conditions will improve.”
The interest rate bet that could break either way
Here is where business planning becomes genuinely difficult. Westpac’s base case is that the RBNZ holds the OCR at 2.25% until December, then begins hiking. Eckhold’s logic is that rate rises cannot undo an oil shock that has already occurred.
But financial markets are pricing in three OCR rises to 3% starting mid-2026. If markets are right and Westpac is wrong, businesses with variable-rate debt face rising costs at exactly the moment consumer demand is weakening. That combination of weaker revenue and higher debt servicing is the scenario every CFO should be stress-testing right now.
ASB is more pessimistic than Westpac overall, having cut its 2026 GDP forecast by 1.6 percentage points and pushed recovery expectations into 2027. Tuffley said: “Households were only just starting to feel some relief. Higher fuel prices are now squeezing budgets again, and that pressure will be felt right across the economy.”
Confidence is pulling back ahead of the actual impact
Westpac’s weekly commentary from 11 May makes an underappreciated point: New Zealand entered this shock with labour market slack and only nascent growth momentum. That makes it more vulnerable than economies already running hot. “Whether subsequent events prove to be a delay to the recovery process, or something more serious, remains to be seen,” the commentary notes.
BusinessNZ chief economist John Pask pointed to genuine offsets: construction recovery, tourism back to pre-Covid levels, and Fonterra’s $4 billion consumer brands sale boosting rural incomes. The BusinessNZ Economic Conditions Index for Q1 2026 sits at 18, down 6 from the previous quarter but up 13 year-on-year.
But Pask also warned that “input costs, including fertiliser, are likely to rise significantly if the conflict continues.” And Westpac NZ flagged in late March that firms are already adjusting working capital strategies in response to elevated fuel prices and supply chain uncertainty.
What business owners should actually do
The practical implications are straightforward even if the outlook is not. Pricing reviews cannot wait for certainty – with inflation heading toward 4%, businesses that have not repriced inputs are already absorbing margin compression. The labour market at 5.6% unemployment is a buyer’s market for talent, but it also signals weak consumer demand for anyone in discretionary spending.
On debt, the gap between Westpac’s OCR forecast and market pricing is wide enough to model both scenarios. Anyone refinancing should assume the more aggressive path is plausible.
As Tuffley put it: “This is a time for contingency and scenario planning rather than reliance on any single forecast.” When the optimists have revised their numbers by 40% in six weeks, that is probably the only honest advice anyone can give.
Sources
- NZ looks to be on firmer footing in 2026, Westpac economist says (2026-02-03)
- Iran conflict fallout: Westpac tips GDP to shrink in June quarter (2026-03-25)
- Iran war hitting recovery as Westpac slashes growth, lifts inflation outlook (2026-03-25)
- Westpac revises NZ outlook on oil shock and OCR path (2026-03-26)
- Oil shock puts NZ recovery ‘on ice’, ASB warns (2026-03-31)
- Inflation steady at 3.1 percent in first three months of 2026 (2026-04-21)
- Oil Slick: NZ’s Economy Still Grows Amid Turbulent Times (2026-03-25)
- Kiwi firms tune working capital as fuel prices hit: Westpac NZ (2026-03-30)
- Weekly Economic Commentary 11 May 2026 (2026-05-11)