Westpac has cut its forecasts for the New Zealand economy and warned that the rising cost of fuel along with deepening uncertainty out of the Middle East has left the country facing another year of weak growth and a return to rising unemployment.
In its May Economic Overview released on Wednesday, the bank pushed back its expectation of any meaningful recovery and now expects gross domestic product to grow by just 1.5 percent across 2026. Unemployment is forecast to climb to 5.6 percent as firms hold off hiring while they wait for clearer signals on energy costs and consumer spending.
Westpac chief economist Kelly Eckhold said the economy had not yet tipped into recession but it was not far from one. In comments reported by RNZ, he said “while we are not forecasting a recession, the economy has been knocked off course by a surge in fuel prices and heightened global uncertainty”. He said real petrol and diesel prices were now at 50 year highs, levels he described as comparable to those seen during past global recessions.
The bank assumes that the conflict in the Middle East will continue to restrict shipping through the Strait of Hormuz for several months before pressure starts to ease through late 2026 and into 2027. On that basis Brent crude, which closed near US$104 a barrel on Tuesday, is expected to drift back toward US$83 a barrel by the end of this year and US$64 a barrel by the end of 2027.
Headline inflation is expected to climb into a range of 4 to 5 percent over the coming year, well above the Reserve Bank’s 1 to 3 percent target band, with core inflation also pushing above the target. That has flipped the outlook for interest rates. Westpac now expects the Official Cash Rate to rise toward 3 percent by the end of 2026 with further increases likely through 2027.
Wholesale markets have already moved further than the bank. According to Interest.co.nz coverage of the same release, two full Reserve Bank rate hikes are now priced in by September. That is a significant shift from the easing path that was widely expected at the start of the year when the housing market had begun to lift and consumer confidence was edging higher.
Eckhold said the conflict had removed much of the support for housing and the bank now expects flat to slightly lower house prices through the remainder of the year as households adjust to weaker disposable incomes and the prospect of higher mortgage rates. New figures published by Interest.co.nz show more than one in ten residential properties resold in the first quarter of 2026 went for less than the owner paid, with apartments hardest hit. More than 40 percent of apartment resales were at a loss, and the pain has been concentrated in Auckland.
Some parts of the property pipeline are still moving. New home consents lifted 14.6 percent in the first quarter while build costs were up only 2.2 percent, suggesting that the supply side of the market may finally be catching its breath after years of double digit cost rises. But the bank cautioned that demand is the bigger problem now, with fewer households willing or able to commit to a build in the current environment.
Household spending is expected to slow sharply over the next few months as petrol, food and electricity bills eat further into discretionary budgets. March GST receipts already pointed to softer activity, and Westpac expects retail and hospitality to bear much of the brunt. Business investment is also forecast to ease as firms wait out the cost shock and reassess the price of imported equipment and freight.
The bank still expects stronger growth to return from 2027 as global oil markets normalise and pent up demand is released, but Eckhold warned that the outlook is unusually uncertain and depends heavily on how long the Middle East situation lasts. A more drawn out disruption would mean higher fuel prices for longer and a deeper hit to spending, and could yet tip the country into the kind of shallow recession Westpac is currently expecting to avoid.
The downgrade lands at an awkward moment for the Government. Westpac’s revised numbers sit alongside the news this week that Kiwibank’s planned 500 million dollar capital raise has collapsed and that the United States is reportedly preparing a fresh investigation into New Zealand lamb exports that could reinstate tariffs on more than 600 million dollars of trade. With cost of living pressures intensifying again, the political and economic margin for error keeps shrinking.
What do you make of Westpac’s downgraded outlook? Are you already feeling the squeeze from higher fuel and mortgage costs, and is it changing how you spend or save? Have your say in the comments below.
This article was written by AI, briefed to report the facts, hopefully without some of the bias people bring to the job 🙂
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