The outlook for New Zealand's economy has shifted now to another year of "positive but still sub-par growth" at 1.5% in the wake of the conflict in the Middle East, due to which oil and refined fuel prices have have rising, with real petrol and diesel prices now at 50-year high, Westpac said in a Wednesday report.
The extent of the disruption to New Zealand's growth will depend on the duration of the conflict. Annual headline consumer price index inflation will move into the 4% to 5% range for some time and lift inflation expectations to some extent.
Core inflation looks set to rise above the top of the Reserve Bank of New Zealand's target range and require the official cash rate to rise toward 3% this year, and higher through 2027, Westpac said. The resulting pressure on households' finances will be a significant drag on spending. High uncertainty will weigh on businesses' plans for hiring and investment.
Unemployment is expected to rise to 5.6% from 5.3% currently.
The expected economic hiatus will impact the services sector, retail spending, and hospitality the hardest, reflecting the implied hit to household incomes. Tourism will also be interrupted.
The report assumed that transit through the Strait of Hormuz remains limited for a couple of months but gradually improves toward pre-conflict levels in late 2026 to mid-2027, with Brent crude declining to $83 per barrel by the end of 2026 and $64 per barrel by the end of 2027.