New Zealand’s economy was doing okay when the Middle East oil shock hit, Kiwibank economist Alexandra Turcu says, without setting the world alight.
“The starting point of the economy coming into the oil crisis was solid, but not so strong to send inflation fears soaring,” Turcu says.
Her comments come after Statistics NZ released its gross domestic product data for the March quarter on Thursday. It showed the country’s economy grew 0.8% in the first three months of the year, before the impacts of the Middle East conflict and late-quarter fuel crisis really kicked-in.
“Today’s data is old. It covers the three months of the year that were largely unaffected by the international turmoil that broke out at the end of February. Now the outlook for the economy is shifting by the day," Turcu says.
“The Reserve Bank is all too aware of how dated the numbers are. The potential damage to demand from the increase in oil prices still outweighs the lift in inflation.”
With the announcement of a deal between the United States and Iran, aimed at ending the conflict in the Middle East, Turcu says: “With the war seeming to wrap up this week, the June and September quarters of this year will be much more important.”
'The economy was travelling quite well into the shock' but June quarter data will be different
ASB senior economist Kim Mundy says while the GDP figures suggested a cyclical recovery was building at the start of 2026, the picture for the June quarter will be very different.
“Nevertheless, there is some comfort knowing that the economy was travelling quite well into the shock. Moreover, if tensions continue to ease and the Strait of Hormuz opens, keeping oil prices down, then we think the latter half of 2026 could well be better than our earlier estimates suggested.”
ANZ senior economist Matthew Galt says Thursday’s GDP data showed the moderate economic recovery seen over the second half of 2025 continued into the first three months of 2026, which demonstrates the economy was on an “improving path” until the Middle East conflict broke out.
High frequency indicators suggested the economy stalled after the conflict broke out, he says, but if oil prices stay down where they are now, “there are good odds of the recovery resuming”.
As of Thursday afternoon, Brent crude oil was at US$76.30 a barrel.
OCR hike in July ‘no longer the slam dunk that it was’
At its May Monetary Policy Statement (MPS), the Reserve Bank held the Official Cash Rate (OCR) at 2.25% and signalled OCR hikes were probably on the horizon. The next OCR review is July 8.
However, ANZ's Galt and chief economist Sharon Zollner, think the picture has now changed somewhat.
"On balance, having worked so hard to set up a July hike, we still think the Reserve Bank will deliver it, but it is certainly not the (near) slam-dunk it was. We are also still comfortable forecasting a follow-up hike in September, but we would characterise it as more data-dependent than previously," Galt and Zollner say.
"The Reserve Bank’s OCR track in the September MPS may well imply a more gradual hiking cycle from there and/or a lower endpoint than the May track (with the forecast peak perhaps back down to 3% from 3.28%). Certainly the worst-case scenarios for inflation and the OCR are looking less likely, so the need for insurance hikes is less."
"And given reduced upside risks stemming from the cost shock, less urgency may mean the Reserve Bank is comfortable with a slower pace of hikes," they say.
"But the data will decide, and we are optimistic that this cyclical recovery is going to get back on track. Our OCR forecast might be unchanged, but three hikes because the economy is recovering would be a much more palatable scenario than three hikes because of an unpleasant cost shock that is bad for growth."
The September MPS will be released on September 2.
Following Stats NZ's GDP release, this remained the same perspective for ANZ with Galt saying the GDP data won’t materially shift the Reserve Bank’s thinking.
“Lower oil prices mean that a hike in July is no longer the slam dunk that it was. However, we think there are enough factors at play to tip them over the line to a hike."
“Most important of these is the low starting point for the OCR, with today’s data confirming that the recovery was better established than thought prior to the oil shock, suggesting less need for monetary stimulus," Galt says.
“In addition, a hike is still largely expected, oil prices remain unpredictable, some pricing indicators were looking worrisome prior to the shock, and the growth outlook is now improving.”
'A rate hike is more likely than not in July'
Kiwibank’s Turcu says: “We have some hope that the economy will sputter for a short time, until the end of the year. Tracking sideways, but not tanking. Which was our biggest fear coming into this.”
“We expect that if the economy isn’t weighed down by unnecessary rate hikes, we can get back to a recovery in 2027.”
“But rate hikes are still part of the story as far as the Reserve Bank’s scenarios are concerned from their May MPS. So the war being over does not necessarily move the needle on our call yet, that a rate hike is more likely than not in July,” Turcu says.
ASB’s Mundy didn’t expect the GDP figures for the March quarter to have a large bearing on the RBNZ's OCR outlook.
“The data confirmed that economic recovery was broadening, helped by past monetary policy easing. Developments this week have served to remind us how quickly things can change.
“The US and Iran have agreed to a Memorandum of Understanding, albeit an unsigned one at this stage, and re-opening the Strait of Hormuz is a critical element of the agreement,” Mundy says.
Mundy says they would argue those recent developments would have a greater weighting on the Reserve Bank’s thinking about the future of OCR moves than the March quarter GDP release.
“We still favour a July start to OCR hikes and a 3.25% OCR peak by year end. Risks are skewed towards a later start to Reserve Bank policy normalisation and a more gradual pace of rate hikes beyond that.”
‘Ceasefire and its endurance really matter to us’
Finance Minister Nicola Willis said the latest GDP data confirmed the economy was off to a great start at the beginning of the year.
“I expect next time we get a GDP update, it won’t be as sunny as today,” Willis says.
“But what I'm also seeing is a real bounce back in confidence, and we are seeing that the lower oil prices are giving New Zealanders more confidence about their own household spending. It's giving businesses more confidence about what the future looks like."
“The reality for New Zealand is we're a small trading nation at the bottom of the world. What happens internationally affects us. So, the ceasefire and its endurance really matter to us, but I'm buoyed by the fact that our fundamentals are strong," she says.
1 Comments
These bank economists live in an alternate universe. Was just reading about Broke Boy Tacos having to substantially raise their prices to make the business viable.
The reality is that high-cost structures are baked in. That the oil price has fallen near term doesn't change that. And the economists' paymasters are culpable as thes have troughed on the 'easy money' of credit creation for non-productive purposes for 2 generations.
Their only response is to suggest we need to suppress the cost of credit forever and a day. We are spoonfed by unthinking mediocrity.
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