State of the Nation, August 2026

It’s been a volatile few months for the New Zealand economy. The February surge in oil prices associated with conflict in the Middle East and the resulting uncertainty saw confidence drop sharply and both firms and households become more cautious. However, subsequent developments have been more encouraging than initially feared. The economy entered the shock with more momentum than previously understood, oil prices have averaged much lower than looked likely, and recent business and consumer surveys suggest confidence is recovering.

Aggregated statistics continue to hide significant divergence beneath the surface. Some sectors and regions, particularly those linked to agriculture and tourism, are performing remarkably well, while others remain sluggish. Geopolitical uncertainty remains elevated, but the central narrative has shifted from whether the recovery will survive to how quickly it can regain traction.

Going into 2026, there was a sense amongst New Zealand firms and households that perhaps the worst was finally over. The economic recovery, which seemed to forever be just around the corner, had finally arrived. Business confidence was high, and green shoots were becoming seedlings. The RBNZ had cut the OCR to a low of 2.25%, and discretionary spending was recovering. Not everything was all go: inflation indicators were proving sticky, the level of retail spending and the housing market were still subdued, and dairy prices were showing signs of weakness. But overall, the sense was that the long-awaited recovery had finally arrived.

The escalation of conflict in the Middle East in February and the resulting surge in oil prices caused a sudden wobble. Both consumer and business confidence dropped sharply. Activity indicators weakened and forecasts were revised down, with ANZ lowering its forecast for annual GDP growth this year from 2.8% to 1.7%. However, while it’s early days, the economy is looking more resilient than feared, now oil prices have retreated. Q1 GDP growth revealed more underlying momentum, confidence measures have subsequently rebounded, and many forward-looking indicators now suggest firms are increasingly looking past the initial shock. GDP data for the second quarter is looking likely to print negative, but much of the weakness appears temporary.

The improvement in the data flow is not just about the retreat in oil prices. Parts of the New Zealand economy are doing extremely well. Dairy production reached a record high in the 2025/26 season, red meat prices remain strongly supported, tourism is recovering, and as a result of these dynamics, many South Island regions are outperforming the rest of the country. Not all sectors share that good fortune. Forestry continues to struggle and dairy prices have softened from earlier highs, while El Niño presents a risk to production in the coming season. Nevertheless, strong primary sector incomes and a low New Zealand dollar continue to provide important support for the broader economy.

The RBNZ continues to face an uncomfortable balancing act. In July, the Monetary Policy Committee raised the OCR by 25 basis points to 2.50%, arguing that less monetary stimulus was appropriate given improving growth prospects and ongoing inflation risks, partly but not exclusively as a result of the oil cost shock. The Committee signalled that further hikes are likely but will depend heavily on incoming data. ANZ continues to expect the OCR to promptly rise to 3.0% this year, though RBNZ communications have gone out of their way to stress that the timing of future moves is highly uncertain.

Inflation remains an important source of uncertainty. Annual CPI inflation accelerated to 4.1% in Q2 as fuel prices rose. However, underlying measures of inflation were more benign, and there remains only limited evidence that the fuel shock has broadened significantly through the wider CPI basket. At the same time, surveys continue to show firms reporting elevated pricing intentions, suggesting medium-term inflation risks cannot yet be dismissed. The RBNZ’s own research suggests an unhelpful asymmetry in how New Zealand firms respond to cost increases and decreases. The RBNZ is therefore likely to remain cautious despite some encouraging inflation signals, and of a mood to get the foot off the monetary policy accelerator promptly. For now, we are not forecasting the need to hit the brake (the neutral OCR is considered to be around 3%), but the outlook is highly data dependent. Complicating the picture for monetary conditions, the NZD looks like it may have found a floor but remains weak, while longer-term interest rates are being held up by rising bond yields globally.

The labour market adds another dimension to the picture. Recent data show more spare capacity than previously thought, with unemployment rising to 5.6% and the broader underutilisation rate reaching a 12-year high. Wage inflation remains subdued and appears broadly consistent with inflation eventually returning to target, which should provide some reassurance to the RBNZ. Labour demand indicators remain patchy rather than outright weak, pointing to an economy that is recovering unevenly rather than falling into recession. Hours worked and paid fell in the June quarter, confirming that the economy did hit pause when the oil shock hit. Even so, other details of the labour market report were more encouraging. Employment rose more strongly than expected, with the increase in unemployment reflecting an even larger lift in labour force participation rather than weak hiring or outright job losses. Taken together, the labour market data suggest an economy that paused rather than rolled over. Confidence surveys suggest activity could regain momentum relatively quickly.

Another source of uncertainty for businesses and households is the general election in November, traditionally associated with firms and households delaying major decisions, though the impact is difficult to quantify. From a macroeconomic perspective, fiscal policy is expected to move gradually towards restraint over coming years, though monetary policy remains the dominant influence on the economic cycle.

The outlook for the housing market remains soft. Higher interest rates, election uncertainty and subdued demand are keeping activity constrained, while regional performance continues to vary widely. House prices are expected to drift modestly lower this year, but the risks of a more pronounced downturn have eased as confidence has recovered and the broader economy has proved more resilient than expected. Whether the housing market can move beyond stagnation will depend heavily on confidence, interest rates and the global backdrop – something that can be said of the broader economic outlook.