Economy’s ‘cautious’ recovery

The New Zealand economy is showing tentative signs of a gradual recovery as global fuel prices ease from the highs reached earlier this year, says the New Zealand Institute of Economic Research (NZIER).

However, it adds the recovery remains fragile and its latest Quarterly Survey of Business Opinion, released this month, shows only a modest improvement in business confidence.

Christina Leung, deputy chief executive, says: “Recent manufacturing and services indicators point to some recovery in activity, but households and businesses remain cautious. 

“Retail spending volumes fell in the June quarter as higher petrol and electricity prices crowded out discretionary spending, and the unemployment rate rose to 5.6 per cent. 

“Firms also remain cautious about hiring and investment, with uncertainty around the global outlook and the upcoming New Zealand general election likely to weigh on spending decisions over the remainder of 2026.”

Leung, pictured, notes annual consumers price index (CPI) inflation increased from 3.1 per cent in the March quarter to 4.1 per cent in the June quarter, driven largely by an earlier surge in fuel and electricity prices. 

Underlying inflation pressures are more contained, non-tradable inflation eased slightly, while CPI inflation excluding food, household energy and vehicle fuels was 2.5 per cent. Leung says inflation expectations have also eased as fuel prices have fallen.

“Some evidence suggests that higher fuel costs are feeding through to broader business costs, particularly in construction, agriculture and transport,” she continues. 

“However, spare capacity in the labour market and subdued wage growth are limiting firms’ ability to pass these costs on to customers. 

“We forecast annual CPI inflation to remain above the Reserve Bank of new Zealand’s target band for the rest of 2026, before easing in 2027 as the direct impact of higher fuel prices fades.”