New Zealand's economy expanded by 0.8% in the first quarter of 2026, slightly above the Reserve Bank's forecast of 0.6%, ending a period of two consecutive quarterly contractions. This growth saw strong contributions from services and primary industries, with household spending increasing by 1.1% and exports rising by 2.6%. The first quarter's positive performance, fueled by recovering international tourism, contributed to an annual growth rate of 0.3%. However, despite this initial momentum, the economic outlook has since deteriorated due to the Iran War, with analysts now forecasting a significant slowdown.
The conflict in the Middle East, which escalated in March, has led to a sharp increase in global oil prices. This "Iran war oil shock" is expected to severely impact New Zealand's economic growth, with BNZ head of research Stephen Toplis stating that recent performance data points to a stalling economy and near-zero GDP growth in the second quarter. Infometrics has also revised down its 2026 GDP growth forecast from 2.5% to 1.3%, acknowledging the significant uncertainty.
The rising fuel costs are already affecting businesses, with over two-thirds of respondents in recent surveys citing negative impacts, particularly from fuel prices. This is putting further pressure on household budgets, which are also facing the prospect of higher interest rates. The services sector, while contracting, did so at a slower rate in April (48.9, up from 46.2), and manufacturing remained in marginal expansion (PMI of 50.5). However, the combined employment indicator shows no growth, and economists anticipate the unemployment rate, which has climbed from 4.4% to 5.3% over the past two years, will continue to rise.
Inflation is also a major concern. Economists predict that higher fuel prices will push inflation to 4.8% per annum in the current quarter. Even with an expected moderation in fuel prices later in 2026, inflation is still forecast to be at 3.9% by March 2027 and 3.0% by December 2027. This persistence of inflationary pressures, combined with a weaker economy, creates a challenging environment for the Reserve Bank.
While the direct impact of potential Strait of Hormuz disruption on New Zealand's GDP is estimated to be manageable, ranging from a $1 billion to $2.9 billion reduction depending on duration, the psychological and real effects of the fuel price shock are pervasive. The Treasury has also revised its economic outlook, expecting the economy to expand just 1.2% in the 12 months ending June 2026, with inflation peaking at 4.0% in the final quarter. The government plans to spend $155 billion in the next financial year, with temporary, targeted funding for households and public services facing fuel pressures.
