Is our economic recovery coming at last?

New Zealand's economy could be on track for its long-awaited recovery - if fuel prices can stay lower, Infometrics says.

The economics consultancy has released its latest forecasts, predicting economic growth reaching a four-year high of 2.7 percent in the middle of next year.

However, chief forecaster Gareth Kiernan said that recovery was at the mercy of the geopolitical situation overseas.

"Events over the last week have shown that the situation in the Middle East remains volatile," he said.

"But with diesel prices of around $2.40/L, rather than the $3.80/L we saw earlier this year, sustained cost pressures on businesses are much less pronounced than we had initially feared. The likelihood of inflation persisting above two percent a year beyond mid-2027 has reduced, meaning there is also much less pressure on the Reserve Bank to raise interest rates as far."

"It means for businesses, there's less pressure on them to have to pass on higher fuel costs and higher transport costs to their customers, and so that all flows through into probably less need for interest rates to rise as far as we previously thought either.

"So, put all of that together and conditions are coming together, we think, for the economy to resume the recovery that we were looking at earlier this year before the Middle East sort of blew up."

Kiernan expects the official cash rate to reach 3.0 percent by the end of the year and 3.5 percent next year.

But he said the difference from earlier predictions was that those OCR increases were likely to come in response to improving economic conditions pushing up demand, rather than the Reserve Bank pushing back against inflationary pressures amid a wider downturn.

"It's nowhere near the extent of the rate rises we'd previously been thinking when inflation looked like it was going to be more persistent and problematic for the economy.

"I think the key in terms of those additional rate rises coming through potentially in 2027, if we get to 3.5 percent, it'll be the Reserve Bank responding to a better performing New Zealand economy, less spare capacity, better demand conditions, and therefore, not needing to provide as much stimulus to the economy. Rather than what we were looking at three months ago, which was the Reserve Bank fighting an inflation battle to try and keep that under control."

Kiernan said stronger growth in consumer spending should start to show up in the second half of this year, although that could be constrained by the labour market, with unemployment set to stay around 5.4 percent until mid-2027.

Data this week showed spending last month was flat, after a 2.8 percent year-on-year increase in May. Spending on apparel was down 4.2 percent compared to a year earlier and hospitality was down 1.4 percent.

Kiernan said a weak housing market and limited growth in construction activity would also be challenging for aspects of the recovery in household spending and broader economic growth.

However, business confidence and investment spending remain relatively upbeat, suggesting that firms are preparing themselves for a resumption of the improvement in growth that seemed to be occurring at the start of this year.

"Looking forward, the outcome of the election later this year is a key source of uncertainty, and unpredictable US actions or other international events could again undermine confidence and derail the economy's recovery.

"Businesses and households have become fatigued from the buffeting they have endured throughout the last three years. But the current environment looks less challenging than we expected three months ago, and we are hopeful that more settled conditions prevail."

Kiernan said the recovery that had started before the conflict was patchy but it was starting to spread across a wider set of economic indicators.

"There was certainly a sense when we looked on a regional basis that the high export prices, good returns for farmers across meat and dairy, were flowing through and having an impact in terms of sort of broader economic indicators we were getting through particularly parts of the South Island.

"So there was enough there to feel more confident or comfortable about that recovery than probably at any time in the previous three years."

HSBC chief economist Paul Bloxham, meanwhile, said New Zealand's recovery had been slower than expected because housing market activity had been stagnant for three years.

"Past economic upswings have coincided with strong housing market activity, which, in turn, has typically buoyed household consumption through the 'wealth effect'," Bloxham said. "But not this time."

He said the sharp fall in housing prices meant many households that bought near the peak saw their housing price fall below the price they paid.

"We see this as quite a drag on consumer spending, with RBNZ research showing that housing price falls can have larger effects than price rises on the economy."

Bloxham said he expected growth to rebound from the second half of this year, too.

"Timely indicators are consistent with further strong growth. Although the jobs market remains fairly loose, employment typically lags the cycle, and we expect some improvement through 2026. High meat and dairy prices have supported national incomes.

"We expect a modest increase in housing prices in [the second half of] 2026 and 2027. However, the upswing in housing prices is unlikely to be enough to generate a strong 'wealth effect' for consumption.

"We expect the RBNZ to lift its cash rate further, given it has a 'below neutral' setting in an economy in an upswing. But we see 100bp of hikes by end-2027; versus market pricing of 135bp, with housing a key factor in our more-dovish view."

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