Westpac has revised its NZ growth forecast down to 1.5% for 2026, sees unemployment rising to 5.6%, and expects the RBNZ to start lifting the OCR again as the Iran conflict drives fuel prices higher.
New Zealand will avoid a recession, but the path ahead is bumpy, according to Westpac's latest Economic Overview. The bank has materially downgraded its outlook for 2026, pointing to the Middle East conflict and the resulting surge in oil and fuel costs as the primary disruptor of what had been a modest recovery.
The bank now expects economic growth of around 1.5 percent this year — described as another year of "sub par" performance, following a similarly subdued 2025.
Why the outlook has shifted
Westpac chief economist Kelly Eckhold said the Iran conflict had driven a sharp rise in fuel costs that rippled through to broader living expenses. He described the shift as a material change from recent months, where the economy had been on a recovery path. "While we are not forecasting a recession, the economy has been knocked off course by a surge in fuel prices and heightened global uncertainty."
The conflict's effect on energy markets is the key variable. Oil prices have risen sharply since hostilities escalated, and fuel costs feed into transportation, manufacturing, and ultimately the prices of most goods and services. Westpac's central scenario assumes the conflict resolves without prolonged disruption, but the uncertainty around that is itself a material factor.
Inflation and interest rates
The fuel-driven jump in costs has pushed Westpac's inflation forecast higher. Annual inflation is now expected to rise into the 4 to 5 percent range over the coming year — above the Reserve Bank's target band of 1 to 3 percent, and likely to persist until well into 2027.
That development changes the calculus for the RBNZ, which had been in an easing cycle. Westpac now expects the official cash rate to climb to around 3 percent by the end of 2026, with further increases in 2027.
"Interest rates are moving higher — it's a question of 'when,' not 'if' hikes occur," the bank said.
For households with mortgages, that direction is significant. The period of falling rates that many borrowers were anticipating has been interrupted, at least temporarily. Those on floating or short-term fixed rates will feel the impact sooner; those who have locked in multi-year terms may have a window before refinancing comes due.
Employment and spending
Weaker growth and higher uncertainty are expected to affect the labour market. Westpac forecasts unemployment to rise to around 5.6 percent over the coming year as businesses shelve hiring plans in response to higher costs and uncertainty.
Household spending is expected to slow sharply. Rising living costs — particularly fuel, food, and electricity — are adding to the strain on family budgets that had not fully recovered from the earlier inflation period. The combination of slower employment growth and higher debt servicing costs is a tightening that many households have not faced before.
The housing market
The housing recovery that had shown early signs in 2026 is now expected to lose momentum. Westpac forecasts house prices to be flat to slightly lower over the year, as buyer confidence weakens and the expectation of rising interest rates cools demand.
"The housing market is unlikely to be a driver of growth for the coming year or so," Eckhold said. That is a meaningful shift from earlier forecasts that had expected modest price growth as the OCR came down.
What it depends on
Westpac is explicit that its central scenario is highly dependent on how the Middle East conflict develops. A faster resolution would ease fuel prices and reduce the inflation pressure, potentially giving the RBNZ room to hold or even cut rates again. A prolonged conflict would mean weaker growth and more persistent inflation — and further OCR increases beyond what is currently forecast.
"Rather the view is that the Iran war will merely cause a pause in the economic recovery," Eckhold said. "We expect stronger growth to return from 2027, but the outlook is highly uncertain."
This article is for general information only and is not personalised financial advice. Seek advice from a licensed financial adviser (registered on the FSPR) for guidance specific to your situation.