The economic research outfit NZIER says the recovery that was building in New Zealand earlier this year has been knocked off course by the global fuel crisis, and households should expect another lean stretch before things settle.
In its June Quarterly Predictions, the New Zealand Institute of Economic Research said the lift in retail spending, housing activity and business investment that lower interest rates had been feeding through the economy in late 2025 and early 2026 has stalled. The trigger is the spike in oil prices that followed the conflict between the United States, Israel and Iran, which began at the end of February and pushed petrol and diesel sharply higher across the autumn.
The numbers behind the forecast are blunt. NZIER now expects the economy to grow just 0.6 per cent in the year to March 2026, down from the 0.8 per cent it pencilled in three months earlier. The bigger downgrade is for the following year. Growth in the March 2027 year has been cut to 1.6 per cent, roughly half the 3 per cent the institute was forecasting in March before the fuel shock landed.
Household budgets carry much of the strain. NZIER trimmed its forecast for household spending growth to 1.4 per cent in the year to March 2026, from 1.8 per cent, and slashed the following year’s figure to 0.8 per cent from 2.6 per cent. Business investment was cut on the same pattern, down to 0.6 per cent this year and 2.1 per cent next year, well below the 5.6 per cent growth that had been expected for 2027.
NZIER senior economist Ting Huang pointed to three forces dragging on the outlook. In comments reported by interest.co.nz, Huang named “the US-Israel war with Iran since the end of February, along with the related fuel crisis and heightened uncertainty” as the main headwinds. Huang also noted that “soft wage growth against these increases in living costs presented additional challenges” for households, squeezing the discretionary spending that retailers and hospitality rely on.
The fuel figures show how fast the shock moved through pump prices. Petrol rose 33.6 per cent over the two months to April, then eased back 3.8 per cent into May. Diesel, which matters most for freight, farming and the wider cost of moving goods, surged 94.9 per cent over the same two months before falling back 11.4 per cent. Even after the partial retreat, both fuels remain far above where they sat at the start of the year, and the cost is still working its way into freight rates, food prices and the broader cost of living.
That feeds straight into inflation. Annual consumer price inflation was 3.1 per cent in the March 2026 year, already above the top of the Reserve Bank’s 1 to 3 per cent target band. NZIER expects the June quarter reading to come in well above 4 per cent as the fuel rise is fully captured. The institute thinks inflation will return to the target band by the middle of 2027, but only if the conflict and the oil price pressure ease by the end of this year.
The forecast also sets up a difficult call for the Reserve Bank. The Official Cash Rate has sat at 2.25 per cent since the May review, after a long run of cuts aimed at supporting the recovery. NZIER now expects the bank to reverse course and lift the rate by 25 basis points at its next decision on 8 July, followed by a second increase in September. That would mark New Zealand joining the global move back towards higher rates, and it would push up mortgage and business borrowing costs just as households are absorbing the fuel hit.
The institute was careful to frame the case for higher rates around expectations rather than the fuel price itself. A one-off jump in petrol and diesel does not normally require a central bank response, because it works its way out of the annual figures once prices stabilise. The worry is what comes next. NZIER said the Reserve Bank’s “primary concern is minimising the risk that higher fuel prices spill over into broader inflation expectations and wage-price-setting behaviour”, the point at which a temporary shock can become entrenched.
There is a thread of reassurance in the detail. NZIER said the spare capacity that has opened up in the economy is limiting the ability of firms to pass on higher costs, which is keeping core inflation and medium-term expectations contained for now. Weak demand, in other words, is acting as a brake on the second-round effects the Reserve Bank fears most. Deputy chief executive Christina Leung leads the institute’s forecasting work, which draws on a consensus of bank and agency economists alongside NZIER’s own modelling.
For businesses and households, the message from the June forecast is one of patience. The conditions that drove the early-year pick-up have not vanished, but they have been overtaken by a fuel shock that is lifting prices, denting confidence and pushing the central bank towards rate rises. NZIER’s view is that the recovery has been delayed rather than cancelled, with the timing now hanging on how long the conflict and the oil price stay elevated.
What is the fuel crisis doing to your household budget or your business right now, and do you think the Reserve Bank should be lifting rates into it? Share your thoughts 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 π
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