Up, down… and up again

Oil prices had fallen $20 per barrel and the price of 91 fuel has been back below $3 per litre as Middle East tensions subsided. But that’s all changed again and now crude oil prices are looking like they’ll remain high for the foreseeable future. That’s likely to impact business and consumer confidence, which had been rising prior to the resumption in hostilities.   

With the global supply of oil as the most significant economic factor in our outlook, here is a quick survey of how we see the situation around the world and in New Zealand:  

US core inflation continues to accelerate 

The US private consumption expenditure (PCE) deflator rose above 4.0% for the first time in three years in May. Excluding the volatile food and energy components, the PCE price (core inflation) index increased 3.4% year-on-year. Price stability is defined as 2% inflation - and the US has not seen that rate since pre-Covid. Meanwhile the unemployment rate in the US sits historically low at 4.2%. So their prospect is full employment and elevated inflation. 

The fed pivots  

Three months ago, the US Federal Reserve's “dot plot” predicted one rate cut in 2026 and no Governors were projecting hikes. But on June 17, we saw a huge pivot. The updated projections showed that nine of eighteen officials expected the fed funds rate to end 2026 higher and six of those nine projecting two quarter-point increases. That’s a huge shift in position inside three months from “when do we cut?” to “are we going to need to hike?”

Japan continues to normalise its fiscal policy

The Bank of Japan hiked rates to 1% in June, the highest since 1995. No surprises in that, being in line with expectations of economists, and continuing the process of policy normalization taking interest rates back to more normal levels and away from remarkably low levels.

The lucky country might not be so lucky 

Seldom has Australia had a recession, avoiding serious downturns during both the Asian Financial Crisis of the 1990’s and Global Financial Crisis of 2008/09. Australia has an inflation problem with core inflation continuing to rise and the Reserve Bank of Australia (RBA) is on the warpath. You get rid of inflation by crushing demand. New Zealand saw it in 2024 and 2025. House prices in Australia are starting to decline. There are more articles appearing about people returning home. New Zealand is in an upswing phase of the economic cycle, while Australia is entering a downswing phase. 

An export friendly NZD and AUD  

Interest rates are key drivers of currency valuations along with other things such as growth, productivity, risk appetites and commodity prices.  The cross has gone from a range of 0.90-0.95 to 0.82 as the RBA lifted interest rates.  A lower currency (and the exporting of precious metals) has seen Australia retake the position as our second largest export nation (replacing the USA).  One suspects we’ll see a lot of Australians on the ski slopes given a stronger AUD makes a NZ holiday cheaper.  

Broccoli and spinach

That was my characterisation of New Zealand’s 2026 Budget. You might not like it but it tends to be good for you. There will be less sugar on offer in pending years. Fiscal deficits need to be trimmed, unless we are prepared to ping the next generation with higher taxes at the same time as inflation needs to be tamed. Cue contractionary fiscal and monetary policy, from stimulatory policy stances at present. That means we’re likely to see a continuation of the government spending less, and a few nudges higher in the Official Cash Rate. Whoever wins this election they are in a fiscal strait-jacket, with massive savings baked into the baseline, while cost pressures mount.  

The Impossible Trinity 

Every New Zealand finance minister faces what I call the Impossible Trinity of challenges. Trying to balance fiscal responsibility (going from deficit to surplus, bending the debt curve), infrastructure demands, and maintaining government services.  In most cases you can only hit two out of these three. So the challenge for the next government is to pick their sacrificial pawn, or be up front and say they plan to raise taxes.

New Zealand’s real economic crisis

The cost of living/inflation remains the biggest concern across New Zealand according to the IPSOS Issue Monitor and various political surveys. In reality, the cost of living crisis is hiding the real crisis which is an income crisis; low wages which are a reflection of poor productivity growth. I’m keeping a close eye whether we see political appetites for changes in the competition landscape. Competition policy connects the cost-of-living AND income crisis. According to the OECD, “International experience shows that competition is one of the most important drivers of long-term growth in productivity AND living standards”. Competition policy crosses that nexus. A political party needs to grab that space.  

From the International Monetary Fund on New Zealand

The International Monetary Fund issued their latest analysis of our economy, and as usual it contains insights worth taking heed of. I’ve extracted a few highlights:

• “New Zealand’s economic recovery is being delayed by the oil price shock and elevated uncertainty, while inflation is expected to remain temporarily above the RBNZ’s target band.”

• “Macroeconomic policies face difficult trade-offs. Monetary policy should gradually withdraw policy accommodation to ensure medium-term price stability. While fiscal consolidation has been delayed due to the prolonged slowdown, buffers should be rebuilt as growth recovers.”

• “The authorities’ targeted and temporary response to the oil price shock has been designed in line with international best practice.”

• “The New Zealand economy is being subjected to frequent shocks, underscoring the importance of the strong policy framework that underpins macroeconomic stability: a flexible exchange rate regime, strong fiscal buffers, and credible central bank.”

• “Structural reforms remain critical to lift productivity and living standards, and to strengthen resilience.”

• “While the outlook is subject to elevated uncertainty, the recovery is expected to resume in the second half of 2026.”

• “Addressing aging-related spending pressures will be important to safeguard long-term fiscal sustainability.” 
   
  The economic bright spots for New Zealand   
   
  I want to end on a positive note about our economic recovery. GDP figures for the first quarter of the year were solid (0.8% for the quarter).  Higher fuel prices led to an economic diversion in Q2 and may continue to be an issue for the foreseeable future.  
   
  Despite the likely continuation of this significant economic headwind, we will be looking for signs the economy is getting back on track for Q3 with monthly sentiment gauges or traffic volumes providing timely signals. The housing market is still making a limited contribution to the recovery.  Hours worked have been rising strongly and point to a recovery in the jobs market late in the year.   
   
  Other brightspots include: 
   
  We’re paying more tax 
   
  The government is starting to see more tax roll in, coming in $900 million higher than expected in the 11 months to May 2026, led by higher company tax payments.  Farmers making money means more tax for the government. 
   
  Migration numbers are solid but not strong   
   
  For the year ended April 2026 year, migrant arrivals were up 2% and departures down 7%, resulting in an annual net migration: gain of 22,800. 
   
  Building consents are on the rise   
   
  In the year ended May 2026, the actual number of new dwellings consented was 39,737, up 19 percent from the year ended May 2025. This sign of improvement is welcome for the industry. However, population growth of around 43,000, suggests there are a lot of houses being built relative to the number of consents depending on your assumptions about the average number of people per house (2.5) or depreciation on the existing housing stock. 
   
  Exports continue to drive our economic recovery  
   
  Annual goods exports were $82.7 billion in the 12 months to May, up $6.9 billion from the previous year.  Goods exports in May 2026 rose by $1.4 billion (18 percent), to $8.9 billion compared to May 2025. Meat and edible offal exports were up 49% in May 2026 compared to May 2025. Dairy +6.9%.  Fruit 11% rise. 
   
  A tale of two cities 
   
  Business number growth is one indicator of economic momentum. Notice the divide between Wellington with New Zealand and Canterbury with New Zealand.  One is struggling and the other looks to be the place people want to do business. There is a lot of talk at present about Christchurch in particular (new stadium etc).  Growth in the number of businesses tells us the story has been brewing for a while.