NZ economy to escape straitjacket of Hormuz closure and conflict

Kiwibank says economic recovery will be a 2027 story

Chief economist says Reserve Bank needs to give economy a break and hold rates

Cash rate rises this year raise recession risk

Election already having a chill on business investment plans

Services, housing, tourism, low currency necessary ingredients of recovery

Kiwibank's chief economist is upbeat the economy is on the road to recovery, but is pleading with the Reserve Bank to leave interest rates unchanged to give some added support.

In the bank's latest economic outlook Jarrod Kerr said the recovery he had been optimistically predicting last year for 2026 has been delayed a year.

"We expected clearer skies this year, but instead we've had to navigate a storm. The important thing is we're still moving forward. The recovery hasn't disappeared, it's just slower than we'd hoped."

Kerr said the economy was gathering momentum before the Middle East conflict broke out, but he saw that as a temporary interruption causing a surge in fuel prices, weakening demand and activity in an economy that was already struggling with a weak jobs market.

"Kiwi households and businesses are feeling the squeeze ... for many, higher costs are still front and centre."

"That's holding back a stronger rebound in spending as New Zealanders continue to balance their books."

Get the economy off its knees

Kerr held to his long term view that the inflation spike caused by the conflict was temporary and the effects would pass relatively quickly.

"We still believe this is a shock that needs to be looked through, with a focus on maintaining conditions that support the recovery and rebuild demand."

Kiwibank expects inflation to peak at 4.2 percent in the current quarter before gradually decreasing to the middle of the Reserve Bank's 1-3 percent target band next year.

Kerr said the RBNZ needed to hold rates steady to give the economy stability and stimulation.

"I don't mind if the economy runs a little faster into next year, I don't worry about the inflationary risks because what we're seeing is that this is a very temporary shock.

"Where will the growth come from, it will come from us getting back off our knees."

He said a better housing market would help lift construction, a low currency would help exports and support tourism, and low interest rates would support households and consumer spending.

Two scenarios

The Kiwibank economists offered two economic scenarios.

The downside, which they put at an "uncomfortable 20 percent chance", was based on a deeper slowdown in global growth, complicated by supply disruptions, and the New Zealand economy falling back into recession.

The upside assumed a swift rebound in the domestic economy as oil prices got back to normal, better confidence lifted activity and demand.

"We would put it at a 25 percent chance."

Kerr said the election would likely put a brake on investment and activity, but given RBNZ support growth could reach 3 percent next year.