State of the Nation, March 2026

As the New Zealand economy faces into the energy price shock arising from the Middle East conflict, high-frequency data such as our Business Outlook survey, the Performance of Manufacturing and Performance of Services Indexes, and the ANZ Truckometer suggest that momentum has been picking up. There is some patchiness evident across the economy, as one would expect – particularly in anything related to the housing market, which continues to go nowhere fast. And GDP data for the last three months of 2025 was nothing flash at just 0.2% quarterly growth. But overall, the story has been one of a gradual but ultimately textbook recovery in response to the OCR cuts that the RBNZ delivered over 2024 and 2025. Encouragingly, the recovery has been broad-based, with every sector reporting a lift in activity over the past six months.

The labour market is also improving gradually but steadily. While the new shock clearly adds risk, our current forecast is that the unemployment rate has peaked, with the unexpected small lift to 5.4% in the last three months of last year due to more people being encouraged to join the labour force than expected, rather than softer employment growth than expected. Net migration has turned noticeably higher, consistent with rising demand. The labour market doesn’t appear to be an inflation threat, but it is perhaps more than usually uncertain how well the skills of available workers match what firms are looking for, given the enormous churn from both inward and outward net migration in recent years. Firms in our ANZ Business Outlook survey are reporting they expect to give out higher wage increases, in contrast to the RBNZ’s forecast that wage inflation will be flat or falling. But in the big picture, it’s early days for the labour market recovery, and there is still plenty of spare capacity to use up – not just in the unemployment rate but also hours worked. 

The agriculture sector has been enjoying strong commodity prices and generally favourable weather conditions over the past couple of seasons, with balance sheets in excellent shape. Dairy prices have rebounded to within 5% of their all-time highs after plummeting in December. Meat prices continue to go from strength to strength. It isn’t universal – forestry, arable farming and viticulture have been having a tough time – but generally speaking New Zealand’s primary exporter incomes have been very strong. An imminent multi-billion-dollar capital return from the sale of Fonterra’s consumer brand will provide a further cash fillip to the dairy sector. 

The housing market remains a relative weak point in the economy. It’s been a wild ride, with prices increasing 50% in two years during the COVID period, only to drop like a stone over 2022. House prices have given up around half their nominal gains, which, combined with strong nominal wage growth during the high-inflation period, has been sufficient to unwind the jump in the house price to income ratio in an orderly fashion. 

Steady cuts in the Official Cash Rate from 5.5% to 2.25% have restored activity in the sector, but there are plenty of listings available and investors remain largely on the sidelines as they contemplate the possibility of a capital gains tax, modest house price forecasts, and now, upward risks for interest rates from the inflationary oil shock. We are forecasting only a very small increase in house prices this year – part of the reason why we are expecting a steady economic recovery rather than a boisterous one.

The question on everyone’s minds now is, will this oil price shock derail the nascent economic recovery completely?

It’s clear it won’t help momentum. Higher petrol prices will reduce spending on other goods and services, just when discretionary spending has finally been showing signs of picking up. Higher transport costs (international and domestic) will boost the prices of other tradable goods, also reducing consumption volumes. Uncertainty about the economic outlook could see some investment and employment deferred, particularly given there was already hesitancy about whether this economic recovery would kick on, given 2025 was softer than hoped. But if the oil shock proves relatively short-lived, things should stay on track, albeit possibly with a bit of a wobble. Key offsets for New Zealand include strong export commodity prices, and the release valve is the NZD, which tends to weaken when trouble hits the global economy. Though of course, the latter would be an offset for activity but not for inflation: an exchange rate fall would exacerbate, rather than alleviate, the initial upward pressure on tradable inflation.

We expect the RBNZ to take a “wait and see” approach over coming weeks. It’s unhelpful that the starting point for inflation is slightly above the top of the target band. But it’s relatively early in the economic recovery, and there is estimated to still be considerable spare capacity in the economy. Confidence is likely to take a hit, and longer-term interest rates have already seen some upward pressure, doing some of the Reserve Bank’s work for it. As long as it remains a temporary shock to tradable inflation, it’s entirely appropriate for the RBNZ to look through it, as there’s nothing they can do to prevent the near-term price spike. It’s also important to remember that once oil prices start to fall (or even just stop rising), the boost to inflation will become a drag. Where it gets difficult is if inflation expectations and price-setting behaviour start to look unanchored from the inflation target. That seems unlikely, given the robustness of the RBNZ’s inflation-targeting remit and the soft starting point of the economy. Even if it did, it’s not something that would become evident for months.

For now, it’s BAU. We continue to forecast the RBNZ to deliver its first hike in December. It was already easy to lay out reasons why that timing could turn out to be off the mark, given the amount of water to flow under the bridge between now and then – and now one could make a case for geopolitical developments boosting the chances of an earlier or later start to the hiking cycle. Fiscal policy may well also have a role to play, given petrol and food price inflation hits very differently across the income spectrum. As with monetary policy, a lot will depend on how prolonged the shock turns out to be. But the lessons of the COVID era will be important – monetary and fiscal policy need to be coordinated to successfully navigate what could be a challenging period.