Inflation, weak spending temper upbeat forecasts for 2026
New Zealand has entered 2026 with the ingredients for an upturn but a recovery that still “looks unconvincing”, according to Infometrics’ latest forecasts – a backdrop Kiwi mortgage advisers will need to navigate carefully.
Infometrics chief forecaster Gareth Kiernan (pictured) said that, despite lower interest rates, higher export incomes and more focus on government investment, momentum remains fragile.
“Households remain hesitant to embrace any potential upturn, especially given the false start of a recovery in 2025, with many people still unwilling to commit to major decisions,” said Chief Kiernan said in a media release. “Consumers and many businesses are fatigued after three years of stop-start conditions. Although some indicators have improved, the overall momentum has been too patchy to fully restore confidence.”
That caution sits uneasily alongside Prime Minister Christopher Luxon’s claim that “the recovery has now arrived” ahead of the 7 November election, highlighting a growing gap between political messaging and what forecasters say households are feeling on the ground.
Jobs turning point, but confidence to build slowly
The labour market is central to Infometrics’ cautiously brighter medium‑term view.
“Unemployment is forecast to stabilise at its current level of 5.3%, before beginning a gradual decline from the June 2026 quarter. This shift supports Infometrics’ upgraded GDP growth outlook of 2.5% for 2026, rising to 2.9% in early 2027 as broader activity strengthens,” Kiernan said.
Westpac senior economist Michael Gordon similarly expects December labour data to show unemployment “has reached its peak”, with employment growing just fast enough to match population gains, while BNZ’s Stephen Toplis points to “early signs of improvement" and unemployment set to "drop... in a quarter or two" as hiring slowly catches up.
Inflation, OCR risks, and limited rate relief
Despite lower mortgage rates already in market, inflation remains a key uncertainty for the next OCR move.
“Annual inflation of 3.1%pa has increased the possibility of the Reserve Bank needing to lift interest rates earlier than previously expected – a risk we signalled last year,” Kiernan said. “We still anticipate the first official cash rate increase at the end of 2026, but if economic growth accelerates and inflation keeps surprising on the upside, the Bank might need to move sooner.”
Westpac economists have struck a similar note, warning that hotter‑than‑expected December inflation has left the RBNZ with “less room to manoeuvre” and that “the RBNZ’s easing cycle has come to a close”, with a late‑2026 hike now looking increasingly likely.
Household spending still the weak link
“Household spending remains the weakest part of the recovery story, but also the most important driver of further economic momentum, with indicators fluctuating and cost-of-living pressures still weighing on budgets,” Kiernan said.
Infometrics expects spending growth to lift gradually towards a peak of 3.3%pa in 2027.
“However, the limited response to lower mortgage rates so far suggests that downside risks to this forecast remain, even with the average interest rate across all mortgage debt easing to around 4.7% in the second half of this year,” Kiernan said.
Westpac expects subdued wage growth – with its labour cost index tracking at around 2% annually – as households pick up extra hours rather than big pay rises, reinforcing why spending is struggling to fire.
“The economy has the ingredients for recovery, but an improvement in the labour market will be needed to increase household confidence and build further momentum,” Kiernan said. “Export incomes are still healthy, interest rates remain low for now, and labour market conditions are gradually improving. The fundamentals are lining up – we just need businesses and households to be confident enough to start acting on them.”
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