Analysis: Last year we produced a piece that was basically frequently asked questions on economics, based on what we were hearing from business groups at the time.
Twelve months on and the questions have changed. Tariff queries have been largely replaced with heightened interest in fuel security and price impacts. Below is a selection of these, and other, recent topics of discussion.
Below, we’ve summarised our responses, most of which are based on assumptions and events that remain highly changeable.
How is it that the global economy and financial markets appear to have taken this shock in their stride so far?
Some countries have been hit harder than others but, yes, at an aggregate level the “biggest oil supply disruption in history” hasn’t put much of a dent in the global economy.
Over the past three months the consensus has tabbed down global growth forecasts for this year just two tenths to 2.9 percent. Forecasts for 2027 have been left untroubled at 3.1 percent. And after tumbling 9 percent at the start of the Iranian conflict, global equity markets have rebounded 18 percent to new all-time highs.
Helping to explain this resilience is some combination of: the continued boom in all things AI, strong corporate earnings (particularly in the US), governments cushioning fuel price impacts, global output being less oil intensive than it was, and an underlying assumption that Iran and the US will soon reach a deal to allow shipping through the Hormuz Strait to resume.
What factors have helped maintain Asian fuel supply given Middle Eastern crude is largely shut off?
With the important disclaimer that we’re not energy or supply chain experts, our read is a roughly even contribution from the following:
- A portion of Middle Eastern crude exports continuing via pipelines in Saudi Arabia and the UAE (and thus avoiding the closed Strait);
- Additional crude feedstock sourced from North America, Russia, and South America making its way to Asian refineries (with the caveat not all crude is created equal);
- Some demand destruction and fuel rationing, the latter particularly through emerging Asia;
- A large drawdown of global oil inventories.
The inventory rundown is of course finite in nature and is hence being closely watched. Significant uncertainty exists as to how long it can continue without oil prices spiking back up again. Another two to three months appears close enough to consensus, from what we’ve seen.
Where might oil/fuel prices ultimately settle, once flows out of the Middle East resume?
It’s an area of both huge interest and, equally, uncertainty. The consensus appears to be lower than where prices are now but well above pre-conflict levels. That’s consistent with futures pricing in the oil market, although we note this is not a clean “forecast” per se.
The fuel price assumption underpinning our inflation (and broader) forecasts is that current prices normalise in line with the run-rate in oil futures pricing, adjusted for the exchange rate.
Running the numbers currently implies a 91 unleaded price around $2.70/litre by the end of the year. That will continue to fluctuate as volatility in oil prices continues. And if our assumption sounds heroic, as it may be, it simply reinforces the downside risk on our growth forecasts and upside to those for inflation. All this said, recent developments are, directionally, not miles away from our assumptions.
Are there any buffers helping to cushion NZ’s economy?
Buoyant primary sector revenues continue to flow, particularly for meat and dairy, with the outlook favourable. Global demand is holding in okay (as above), net migration is cycling higher, and the NZ dollar trade-weighted index has fallen to 7 percent below average.
These buffering factors are, alas, unlikely to prevent a stalling in the economy in the current quarter. We still think activity will stagger back to life in the second half of 2026 though, assuming the Strait reopens.
Last week’s small bounce in May business confidence and activity metrics provides some hope that, despite the obvious pain from the fuel price shock, there remains a modicum of momentum in the economy.
How much of an impact will there be on the tourism sector?
Tourist arrivals have been humming recently, running 15 percent ahead of last year and providing an important source of support for retailing and the economy more generally, especially in the lower South Island.
Higher airfares, particularly for long haul travel, reduced airline capacity, and a generally warier consumer seem likely to curtail some tourism activity later this year. Interestingly, we didn’t encounter much overt pessimism in the sector in our recent travels in Otago. For some, the continued depreciation in the NZD/AUD exchange rate may help in buoying NZ’s appeal across the Tasman.
As but one illustrative example, annual inflation in NZ domestic accommodation prices is running about 2 percent. Expressed in Australian dollars, the same index is down 1 percent year on year.
How is it that house prices have gone in such different directions around the country?
The outperformance of the southern housing markets has been dramatic. Since national house prices stopped falling in April 2023, Auckland prices have eased a further 1 percent, Wellington’s have fallen 3 percent while those in Otago, Canterbury, and Southland are up 8½ percent, 9½ percent, and 19 percent respectively (REINZ House Price Index, seasonally adjusted).
This is often termed ‘divergence,’ but the chart shows it’s more ‘convergence.’ Back in 2016 there was a historically wide difference in regional house prices which has been narrowing since.
In our view there are three key factors underpinning this: 1) relatively sturdier mainland economies; 2) the continued internal migration of folk from the north island to the south; and 3) differing housing supply responses, with Auckland in particular standing out.
All three of these factors broadly remain in play. Regional house price relativities are also not yet historically extreme, so we think the convergence trend can run further.
Are people going to keep leaving for Australia?
A net loss of NZ residents to Australia is the norm. Since 2004, the average annual net outflow has been 19,000. So, it’s very likely this net westward migration continues.
Nonetheless, the pace of these departures has slowed or at least plateaued. In mid-2024, a net 32,000 made the move, an 11-year high. The latest (lagged) official data, for the year to September 2025, put the number at a net 29,000.
Relative labour market trends tend to be the big driver of the trans-Tasman migration cycle. Job opportunities, essentially. The pull of Australia has started to fade on this front, with the unemployment rate across the ditch rising to 4.5 percent and the number of new job advertisements flat lining, particularly in NSW and Victoria. On their own, these developments lean towards the trend in fewer NZ departures to Australia continuing.
However, the fuel price shock is a major source of new uncertainty. We expect the NZ labour market to deteriorate anew. Unemployment is expected to keep rising through to 5.7 percent by the end of the year but uncertainty abounds, including what this might mean for the relativities to Australia.
We’ll be watching relative trends in antipodean job ads for an early lead. These had been tending back towards NZ up until February.
Won’t higher interest rates crunch the economy?
There’s no getting around the fact higher interest rates add to the challenges facing economic growth and the labour market.
It’s nonetheless worth bearing in mind CPI inflation is not only the Reserve Bank’s sole target, but inflation is slowing growth itself by compressing household purchasing power. Containing medium-term inflation should be a priority, acknowledging the uncomfortable trade-offs involved.
There’s also the starting point. Cuts over 2024 and 2025 mean the official cash rate (OCR) is currently at a stimulatory setting of 2.25 percent. Lifting it back towards neutral, in the first instance, is more akin to easing off the accelerator than jumping on the brakes.
Finally, markets, and arguably mortgage borrowers, seem to be aware of what’s coming. Higher interest rates have been built into expectations to some extent.
How high will the Reserve Bank need to take the OCR?
Perhaps the less-controversial bit is the Reserve Bank returning the cash rate to some semblance of neutral this year. That intent was relatively clear from the bank’s commentary last week.
We’ve shaded our forecasts to build in the first 25bps hike in July and a series of hikes thereafter (3.25 percent by year end). Thereafter, a whole range of moving parts, not least the unpredictable global backdrop, makes forecasting extraordinarily difficult.
As depicted in the chart, market pricing implies an OCR peak of 3.7 percent by the end of 2027. That’s a little higher than the Reserve Bank’s (conditional) 3.2 percent expectation, but a touch below our 4.0 percent. Rather than a precise forecast the latter is a nod to our view the cash rate may ultimately need to rise above neutral to defeat inflation.
Disclaimer: This publication has been produced by Bank of New Zealand (BNZ). This publication accurately reflects the personal views of the author about the subject matters discussed, and is based upon sources reasonably believed to be reliable and accurate. The views of the author do not necessarily reflect the views of BNZ. No part of the compensation of the author was, is, or will be, directly or indirectly, related to any specific recommendations or views expressed. The information in this publication is solely for information purposes and is not intended to be financial advice. If you need help, please contact BNZ or your financial adviser. Any statements as to past performance do not represent future performance, and no statements as to future matters are guaranteed to be accurate or reliable. To the maximum extent permissible by law, neither BNZ nor any person involved in this publication accepts any liability for any loss or damage whatsoever which may directly or indirectly result from any, opinion, information, representation or omission, whether negligent or otherwise, contained in this publication.
