New Zealand's Economic Recovery Faces Threat from Middle East Conflict
On Thursday, New Zealand will release its latest economic figures, assessing growth before the impact of the US-Israel war on Iran. This data comes at a critical juncture as the nation's fragile economic recovery shows flickers of improvement, with economists predicting its annual growth could surpass that of its larger neighbour Australia this year. However, the escalating conflict in the Middle East casts a dark shadow over this outlook, posing a significant threat to New Zealand's isolated and exposed economy.
Isolated and Exposed: Can New Zealand Withstand the Global Oil Shock?
New Zealand is particularly vulnerable to the energy shocks produced by the Middle East conflict, as well as to economic crises in general. The small, isolated nation is highly dependent on global trade and tourism, making it susceptible to disruptions in supply chains and shipping. Finance Minister Nicola Willis expressed concern this week, stating, "We would far prefer this wasn't happening to the New Zealand economy, and it's not good for the New Zealand economy." The economy and cost of living are set to be central issues in the upcoming November elections, and while confidence had been building, the war introduces new uncertainty.
New Zealand's economy has been battered by recession and stagnation following the Covid-19 pandemic, struggling to find its footing as inflation pressured businesses and forced households to rein in spending. Independent economist Benje Patterson noted, "We've been through an economic trough that's been just as deep and prolonged as that which followed the global financial crisis." Shamubeel Eaqub, another economist, added, "It's been a tough couple of years – like, really tough. We've had significant reduction in the economy, job losses, business closures, all that kind of stuff. But there are signs that things are kind of bottoming out and beginning to improve."
Growth Projections and Green Shoots
The upcoming gross domestic product (GDP) data is expected to show New Zealand's economy grew 1.6% over the course of 2025, according to a Westpac forecast. Growth is then projected to accelerate to 2.8% this year, ahead of the 2.5% forecast for Australia. The International Monetary Fund (IMF) also estimates that GDP growth in New Zealand will overtake that of Australia in 2026, albeit by a smaller margin. Kelly Eckhold, chief economist at Westpac New Zealand, observed, "Increasingly we were getting signs here that this economy had gone from operating below trend to one where it actually seemed to be expanding at a pretty decent clip."
Key economic indicators have started to turn up in recent months, with green shoots including rising job adverts and growth in the workforce. Strong demand for exports, particularly meat and dairy, has helped turn things around, while tourism has surged post-pandemic. Additionally, a string of interest rate cuts have significantly reduced fixed mortgage rates, raising hopes of a sustained increase in consumer spending. Patterson highlighted this, saying, "That's the gravy money for many households. That's the beer at the pub, or upgrading your bike, or going for a night away somewhere."
Risks from the Middle East Conflict
Despite these positive signs, the US-Israel war on Iran risks derailing New Zealand's progress. Robust confidence in the nation's trajectory has been undermined in recent weeks by the conflict, which has severely disrupted energy markets and heightened fears for the global economy. Eckhold cautioned, "I don't think that we would say that this is a disaster yet for the economy," but added that Westpac will "probably" reduce its 2026 growth forecast. He suggested, "I think it's probably more one where perhaps the economy could pause for a quarter or so while the dust settles."
Higher oil prices are already affecting New Zealand, with petrol at the pump rising roughly 45-50 cents per litre. The impact of the Middle East conflict on countries across Asia, which is a major source of demand for New Zealand's exports and tourism, is likely to have a knock-on effect as well. Eaqub explained, "Because we're small, we get knocked around by shocks more. So the volatility is higher." In contrast, Australia, with five times as many people, "can absorb shocks better, because it's got a larger domestic economy."
Long-Term Structural Challenges
Eaqub also pointed out the long-term structural challenges, noting, "It's all very well to kind of celebrate the short-term divergence between growth rates. But what really matters is the structural story where Australia has consistently outperformed New Zealand since the mid-1970s." After a record exodus of workers leaving the country, periods of stronger growth in New Zealand typically stem the flow of people relocating to Australia. Eaqub said, "When there are more job opportunities at home, people will stay, if they want to stay."
After a challenging few years, confidence in New Zealand's outlook remains fragile. People will believe there's a recovery when they can see it and feel it rippling through their communities. Eaqub summed it up, "We're all waiting for it. It just hasn't turned up yet." As New Zealand navigates these turbulent times, the release of Thursday's economic figures will provide a crucial snapshot of its resilience in the face of global uncertainties.
