Just as New Zealand\u2019s fragile economic recovery shows flickers of improvement \u2013 with economists predicting its annual growth could surpass that of its larger neighbour Australia \u2013 it is facing a new threat: the war in the Middle East.<\/p>\n
New Zealand is particularly exposed to the energy shocks produced by the conflict \u2013 and to economic crises generally \u2013 with the small, isolated nation highly dependent on global trade and tourism. It is susceptible to disruptions in supply chains and shipping.<\/p>\n
\u201cWe would far prefer this wasn\u2019t happening to the New Zealand economy, and it\u2019s not good for the New Zealand economy,\u201d finance minister Nicola Willis said this week.<\/p>\n
The economy and cost of living will be the central issues in elections, set to take place in November<\/a>, and while confidence had been building \u2013 and New Zealand is showing signs its economy is finally drawing a line under its worst stretch in almost two decades \u2013 the war creates new uncertainty.<\/p>\n \u201cWe\u2019ve been through an economic trough that\u2019s been just as deep and prolonged \u2026 as that which followed the global financial crisis,\u201d said Benje Patterson, an independent economist.<\/p>\n New Zealand\u2019s economy has been battered by recession and stagnation that arrived in the wake of the Covid-19 pandemic. The country struggled to find its feet as inflation piled pressure on businesses and drove households to rein in spending.<\/p>\n \u201cIt\u2019s been a tough couple of years \u2013 like, really tough. We\u2019ve had significant reduction in the economy, job losses, business closures, all that kind of stuff,\u201d says Shamubeel Eaqub, an economist.<\/p>\n \u201cBut [there are] signs that things are kind of bottoming out and beginning to improve.\u201d<\/p>\n On Thursday, New Zealand will release its latest economic figures, assessing growth before the impact of the conflict. Gross domestic product (GDP) data is expected to show New Zealand\u2019s economy grew 1.6% over the course of 2025, according to a Westpac forecast. Growth in New Zealand is then set to accelerate to 2.8% this year, the bank projects \u2013 ahead of the 2.5% growth forecast for Australia<\/a>.<\/p>\n The International Monetary Fund (IMF) also estimates that GDP growth in New Zealand<\/a> is set to overtake that of Australia<\/a> in 2026, albeit by a smaller margin.<\/p>\n Key economic indicators \u201cstarted to really turn up\u201d in recent months, says Kelly Eckhold, chief economist at Westpac New Zealand.<\/p>\n \u201cIncreasingly 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.\u201d<\/p>\n Eckhold cautions that it remains \u201cearly days\u201d, with unemployment finishing 2025 at its highest level in a decade. But green shoots \u2013 including rising job adverts and growth in the workforce \u2013 have started to materialise.<\/p>\n Strong demand for its exports, particularly meat and dairy, have also helped to start turn things around. Tourism has surged post-pandemic. And a string of interest rate cuts have significantly reduced fixed mortgage rates, raising hopes of a sustained increase in consumer spending.<\/p>\n \u201cThat\u2019s the gravy money for many households,\u201d says Patterson. \u201cThat\u2019s the beer at the pub, or upgrading your bike, or going for a night away somewhere.\u201d<\/p>\n Still, the US-Israel war on Iran risks derailing this progress. Robust confidence in New Zealand\u2019s trajectory has been undermined in recent weeks by the conflict, which has severely disrupted energy markets<\/a> and heightened fears for the global economy<\/a>.<\/p>\n \u201cI don\u2019t think that we would say that this is a disaster yet for the economy,\u201d says Eckhold, although he adds that Westpac will \u201cprobably\u201d reduce its 2026 growth forecast.<\/p>\n \u201cI think it\u2019s probably more one where perhaps the economy could pause for a quarter or so while the dust settles.\u201d<\/p>\n Green shoots \u2013 including rising job adverts and growth in the workforce \u2013 have started to show in New Zealand. Photograph: Bloomberg<\/p>\n Higher oil prices are already affecting New Zealand, with petrol at the pump rising roughly 45-50 cents per litre. But the impact of the Middle East conflict on countries across Asia, which is the source of so much demand for its exports, and tourism, is likely to have a knock-on effect, too.<\/p>\n \u201cBecause we\u2019re small, we get knocked around by shocks more. So the volatility is higher,\u201d says Eaqub. Australia, with five times as many people, \u201ccan absorb shocks better, because it\u2019s got a larger domestic economy.\u201d<\/p>\n \u201cIt\u2019s all very well to kind of celebrate the short-term divergence between growth rates,\u201d says Eaqub. \u201cBut what really matters is the structural story where Australia has consistently outperformed New Zealand since the mid-1970s.\u201d<\/p>\n