That would result in weaker GDP with annual growth forecasts for 2026 reduced by around 1.6 percentage points, from 2.9% to 1.3%.
“The sharp spike in fuel prices in March is expected to result in a contraction in economic output over [the second quarter], with a direct hit to consumer spending,” Tuffley said.
ASB now expects the economy to contract by 0.3% in the second quarter (beginning tomorrow) and expand by 0.3% in the third.
“Prior to the oil shock, New Zealand was positioned for a modest recovery over 2026, supported by lower interest rates, easing cost-of-living pressures and signs of improvement in the labour market,” Tuffley said.
“With the new headwinds of higher fuel prices and potential fuel scarcity, that recovery is now unlikely to take place until 2027.”
Industries like tourism had performed well in 2025, supported by the lower New Zealand dollar.
“However, higher fuel prices, uncertainty around fuel security and flight cancellations are likely to reduce tourist arrivals,” Tuffley said.
Nick Tuffley, ASB chief economist, says “the latest rebound won’t be as sharp and quick”. Photo / Supplied
Last week, Westpac economists revised their full-year growth forecast down to 1.9%, picking a contraction of 0.4% in the second quarter and 0.5% growth for the third quarter.
Westpac also picked unemployment to rise to 5.6% (from 5.4%) in the second and third quarters.
It picked inflation to peak at 4.1% in the second quarter and had house prices falling by 0.9% for the calendar year.
In its revised outlook today, ASB forecasts the annual inflation rate to peak at 4.2% in the second quarter before falling back to 4% and 3.8% in the remaining quarters of the year.
It sees unemployment peaking at 5.5% in the second quarter and picks house prices to fall by around 1% a quarter before finishing the year flat.
“If the war ends soon, the outlook will be rosier than what we lay out here, and we’d love to be wrong because of that outcome,” Tuffley said.
Eventual retracement of energy costs, resultant spare capacity and the subdued domestic demand backdrop should ensure the return to sub-3% inflation by 2027, he said.
But there was also the risk that higher near-term inflation could result in “a prolonged inflationary headache if it filters through into broader wage and price setting”.
“We are keeping close tabs on inflation expectations which are assumed to initially tick up but then move towards 2% by the end of the projection period.”
ASB still expects the Reserve Bank (RBNZ) to hold the OCR at 2.25% for much of this year but cautions that the risks are tilted towards an earlier start to OCR hikes.
“The RBNZ may have to lift the OCR above neutral levels (circa 3.25%) in 2027 if higher near-term inflation looks likely it will seep into broader wage and price setting,” Tuffley said.
Supply shocks were incredibly challenging to navigate, with an opposing skew of risks and elevated uncertainty underpinning the RBNZ’s dilemma,” he said.
Incoming Governor Anna Bremen had been dealt a “tough hand”, he said.
Despite the challenging outlook, ASB economists noted some silver linings.
The dairy sector remains a bright spot, supported by strong global prices and the flow‑through of the payout from Fonterra’s Mainland Group divestment.
“This is a time for contingency and scenario planning rather than reliance on any single forecast,” Tuffley said.
“If the conflict eases sooner than expected, the outlook would improve quickly. But for now, households and businesses need to be prepared for a tougher, more uncertain period.”
Liam Dann is business editor-at-large for the New Zealand Herald. He is a senior writer and columnist, and also presents and produces videos and podcasts. He joined the Herald in 2003.
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