OECD Economic Outlook, Volume 2026 Issue 1

New Zealand

After contracting in 2024, the New Zealand economy began to recover in the second half of 2025. It is projected to grow by 1.4% in 2026 and 2.2% in 2027, supported by earlier monetary easing and resilient exports. However, the recovery remains fragile, with labour market conditions still soft and confidence weakened by higher energy costs and elevated uncertainty. Inflation, which remained slightly above the 1–3% target band in early 2026, is projected to rise further in 2026 as higher energy prices feed through to transport and other input costs, before moderating in 2027. Risks remain tilted to the downside, including from energy supply.

Fiscal consolidation should proceed steadily to ensure sustainability, while retaining flexibility if downside risks materialise. Energy-related support should remain temporary and targeted and maintain incentives to reduce energy consumption. Monetary policy should remain data-dependent, ensuring that inflation expectations stay anchored while balancing renewed inflation pressures against remaining spare capacity. Structural reforms are needed to lift weak productivity and strengthen resilience, including improving energy security and affordability, deepening capital markets, strengthening competition and advancing digitalisation and innovation, including in the health sector.

A modest recovery is underway, but higher energy costs and uncertainty weigh on momentum

The economy has continued to recover gradually since the second half of 2025, supported by lower interest rates and resilient exports. However, the recovery remains fragile and uneven, with domestic demand subdued, labour market conditions soft, and net inward migration markedly below earlier highs. Annual inflation remained at 3.1% in the first quarter of 2026, slightly above the 1–3% target band, with higher fuel and energy prices putting renewed pressure on inflation, eroding household purchasing power and raising firms’ costs. Tourism has continued to recover, although business and consumer confidence have deteriorated amid the evolving conflict in the Middle East.

The recent energy shock has increased transport and input costs and heightened concerns about fuel supply resilience, reflecting New Zealand’s dependence on imported refined fuels. This is affecting confidence and is likely to erode household real incomes and tourism-related activity in the near term, with higher diesel and jet fuel prices adding to transport costs. Recent regulatory steps to widen fuel supply options should help ease some supply pressures. At the same time, goods exports have remained resilient, supported by solid global demand for key agricultural commodities, including beef and dairy. The reduction in United States tariffs from 15% to around 10% in February 2026 may provide some relief to export prospects, but continued uncertainty around global trade policy is likely to weigh on exports, investment and business sentiment.

New Zealand

1. Adjusted retail price.

Source: Businessnz; CEIC - ANZ Bank New Zealand; OECD Economic Outlook 119 database; and Ministry of Business, Innovation & Employment.

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New Zealand: Demand, output and prices

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Monetary policy is on hold, while fiscal policy is supportive

Renewed energy-related price pressures are emerging, while the recovery has become more uncertain and spare capacity remains in the economy. Against this backdrop, the Reserve Bank decided in a split vote to keep the policy rate unchanged at 2.25% in May 2026 after reducing the official cash rate by a cumulative 325 basis points between August 2024 and November 2025. Monetary policy should continue to look through the initial fuel price shock, provided medium-term inflation expectations remain well anchored, but will need to move towards neutral (around 3%) if it becomes clearer that the recovery remains on track despite the fuel price shock. The fiscal stance is projected to be mildly expansionary in 2026 before mild consolidation in 2027. In response to the energy shock, the government has allocated part of its planned allowance for new initiatives to introduce temporary and targeted support measures, including an increase in the in-work tax credit for eligible working families, alongside regulatory changes to widen fuel supply options.

The recovery is expected to be gradual, while downside risks remain elevated

Economic growth is projected to strengthen gradually to 1.4% in 2026 and 2.2% in 2027. The recovery will be supported by continued pass-through of earlier monetary easing, resilient goods and services exports, and policy support such as accelerated depreciation incentives under the Investment Boost programme. In the near term, higher energy and input costs and heightened uncertainty are expected to restrain investment and consumption by weakening confidence and household real incomes. Inflation is projected to rise to 3.5% in 2026 as higher fuel, transport and other input costs feed through to prices, before easing gradually towards the 2% midpoint as spare capacity persists and the effects of the energy shock fade. Risks are tilted to the downside, including from a further deterioration in energy supply conditions and climate-related events that could disrupt agricultural output.

Lifting productivity and improving energy security are key priorities

Fiscal consolidation should proceed steadily over the medium term to address the structural deficit and rebuild buffers against ageing-related spending pressures and future climate risks, while allowing flexibility in the short term if conditions worsen. Improving energy security and affordability is essential, including by easing barriers to investment in non-gas firming capacity, expanding demand-side flexibility and strengthening competition and transparency in electricity markets. Reviving productivity growth will also require deeper capital markets to improve access to long-term finance and risk capital, alongside a more open and predictable regulatory environment that supports investment and innovation. Further digitalisation, particularly in the health sector, would help raise spending efficiency and ease ageing pressures.