Isolated and exposed: can New Zealand’s fragile economic recovery withstand the global oil shock? | New Zealand

While New Zealand’s fragile economic recovery is showing signs of improvement, with economists predicting its annual growth could surpass that of its larger neighbour, Australia, it is facing a new threat: war in the Middle East.

New Zealand is particularly exposed to the energy shocks of conflict and economic crises generally, due to the small, isolated nation heavily reliant on global trade and tourism. It is sensitive to disruptions in supply chains and transportation.

“We would prefer this not to happen to the New Zealand economy, and it’s not good for the New Zealand economy,” finance minister Nicola Willis said this week.

The economy and the cost of living will be key issues in November’s election, and while confidence is rising – with signs that New Zealand’s economy is finally entering its worst period in almost two decades – the war is creating new uncertainty.

“We have gone through an economic trough as deep and as long-lasting as that experienced in the aftermath of the global financial crisis,” said independent economist Benje Patterson.

New Zealand’s economy has been hit by the slump and recession that followed the Covid-19 pandemic. The country struggled to get back on its feet as inflation put pressure on businesses and led households to rein in their spending.

“It’s been a tough few years, really tough. We’ve had a significant downturn in the economy, job losses, business closures, things like that,” says economist Shamubeel Eaqub.

“However [there are] Signs that things have bottomed out and are starting to get better.”

On Thursday, New Zealand will release its latest economic figures assessing growth ahead of the impact of the conflict. Gross Domestic Product (GDP) data is expected to show New Zealand’s economy growing by 1.6% through 2025, according to a Westpac forecast. The bank expects growth in New Zealand to accelerate to 2.8 percent this year. 2.5% growth forecast for Australia.

The International Monetary Fund (IMF) also said that GDP growth New Zealand set up to leave it behind Australia Albeit by a smaller margin in 2026.

Kelly Eckhold, Westpac New Zealand’s chief economist, says key economic indicators have “really started to improve” in recent months.

“We were increasingly getting signs here that this economy was going from operating below trend to a point where it looked like it was expanding at a pretty good pace.”

Eckhold warned it was “early days” yet, with unemployment set to end 2025 at its highest level in a decade. But green shoots are beginning to materialize, including increased job postings and growth in the workforce.

Strong demand for its exports, especially meat and dairy products, also helped turn things around. There was an increase in tourism after the pandemic. And a series of interest rate cuts has significantly reduced fixed mortgage rates, raising hopes of a sustainable rise in consumer spending.

“This is the gravy money of many households,” says Patterson. “This is drinking beer at the bar, renovating your bike, or going somewhere for a night.”

Yet the US-Israeli war against Iran risks derailing this progress. Strong confidence in New Zealand’s outlook has been undermined in recent weeks by conflict that has severely disrupted energy markets and raised fears for the global economy.

“I don’t think we’re going to say this is a disaster for the economy yet,” says Eckhold, but adds that Westpac will “probably” cut its 2026 growth forecast.

“I think this is a period where the economy may stall for about a quarter until the dust settles.”

High oil prices are already affecting New Zealand; Gasoline at the pump increases by about 45-50 cents per liter. But the impact of the conflict in the Middle East on countries across Asia, the source of so much demand for exports and tourism, will also likely have a knock-on effect.

“Because we are small, we are more exposed to shocks. Therefore, volatility is higher,” says Eaqub. Australia, which has five times the population, “can absorb shocks better because it has a larger domestic economy.”

“It’s great to celebrate the short-term difference in growth rates,” says Eaqub. “But what really matters is the structural story in which Australia has consistently outperformed New Zealand since the mid-1970s.”

Eaqub says periods of stronger growth in New Zealand have often stemmed the flow of people moving to Australia after record numbers of workers left the country.

“When there are more work-at-home opportunities, if people want to stay, they will.”

After a challenging few years, confidence in New Zealand’s outlook remains fragile. People will believe there is a recovery when they can see it and feel the healing spreading throughout their community.

“We’re all waiting for this,” Eaqub says. “It hasn’t appeared yet.”