New Zealand forecasts slow economic recovery
Sydney (28 May)
New Zealand’s economy will run below capacity until the 2029-30 financial year to 30 June, because of oil price increases triggered by the US-Israeli war in Iran, Treasury forecasts from the Government’s 2026-27 Budget show.
New Zealand’s negative output gap is expected to fall from 2.5% in 2025-26 to 2.4% in 2026-27 and 0% by 2029-30, baseline Treasury forecasts released on 28 May show. But its unemployment rate is expected to rise from 5.2% to 5.5% over the same period, before falling to 4.4% by 2029-2030.
Annual Inflation will reach 4% in June 2026 – outpacing wage growth by 1.4% points – and fall to 1.6% in June 2027, before rising back to just over 2% in 2028, under Treasury’s baseline forecast.
Treasury’s baseline forecast – which it produced on 24 April – assumes that high oil prices will depress economic activity in the short term, without impacting New Zealand’s productive capacity, it said in the Government’s 2026-27 Budget.
But recent oil futures prices increases and declines in economic confidence create upside risks to inflation and downside risks to growth, Treasury said. “Overall, [recent changes] suggest the central forecast may understate inflation pressures while overestimating near-term growth, with risks skewed to higher inflation and weaker activity,” it added.
Its baseline forecast assumes that Brent crude oil prices will peak at $103/barrel in April-June. Brent crude oil traded at $116.73/barrel, on a FOB spot basis, on 18 May, data from the US Energy Information Administration show.
New Zealand housing affordability is expected to improve in 2026-27, but rapidly decline over the rest of the decade, alongside an economic recovery, according to Treasury. House prices will rise by 4.3% per year, on average, between 2027-28 and 2030-31, despite wage growth averaging just 3.4% over the same period, Treasury forecasts show.
In February, Housing Minister Chris Bishop reduced the minimum number of homes that Auckland Council needs to consent in its upcoming Plan Change 120 from two million to 1.6 million.
But the Government has allocated NZ$400 million to encourage councils to consent new houses, through an Incentives for Growth fund.
“Councils will receive payments based on a proportion of the national average new dwelling consent value [they account for]. That funding will help councils invest in the roads, services, and local infrastructure needed to support growing communities,” Deputy Prime Minister David Seymour said.
Treasury’s Budget forecasts paint a rosier picture than Reserve Bank of New Zealand (RBNZ) forecasts published on 26 May. Annual consumer inflation is expected to peak at 4.3% in September 2026, before falling to 2% in September 2027, according to RBNZ forecasts released on 27 May.
By Avinash Govind