Treasury holds medium-term track in PREFU, cuts housing outlook as conflict delays recovery

Treasury says the Middle East conflict has delayed New Zealand's economic recovery but has not derailed it.

The assessment is contained in the Pre-election Economic and Fiscal Update (PREFU), with forecasts finalised in mid-August and reported on 29 September 2026. Treasury said the medium-term outlook for the economy is broadly unchanged from May's Budget, despite higher oil prices and weaker household consumption, according to RNZ.

Annual average growth is now forecast to peak at 3 percent in the year to March 2028. That is down from 3.2 percent in the Budget Economic and Fiscal Update (BEFU). Treasury said stronger economic momentum before the conflict and a strong export sector helped offset the drag from energy costs.

The near-term profile is softer. Treasury expects business investment to be dampened in the June quarter by uncertainty and cost pressure, before recovering later in 2026. That timing is in line with Budget forecasts. Household consumption is weaker, reflecting the pass-through from higher oil prices.

The labour market track is little changed. Treasury forecast unemployment will fall from 5.6 percent to 4.3 percent by 2030, in line with BEFU. For practitioners, that implies a continued gradual absorption of spare capacity rather than a sharp tightening, with wage and participation responses to be tested against outturns.

On prices, Treasury forecast inflation will fall to just below 2 percent in 2027. That is slightly higher than forecast in the Budget. Treasury warned that Middle East uncertainty and longer-elevated energy prices could make inflation more persistent and weaken activity. The Parliamentary Library research paper had noted the Reserve Bank expected annual inflation to peak at 4.3 percent in the September 2026 quarter, while OECD survey material noted higher energy prices were expected to raise near-term inflation but also weaken the recovery. The Reserve Bank held its policy rate unchanged at 2.25 percent in April 2026.

The largest revision is in housing. Treasury forecast house price growth of 0.6 percent in 2027, compared with 4 percent forecast in the Budget. It attributed the weaker outlook to higher interest rates, growth in housing supply and lower net migration.

That is a material shift from the May baseline. In BEFU 2026, published on 28 May, Treasury forecast house prices would grow at an average annual rate of 3 to 4 percent over the forecast period, according to Treasury. In the Half Year Update in December 2025, it had forecast residential investment would gain momentum, supported by lower interest rates, rising house prices and higher net migration. Treasury published a further Fortnightly Economic Update on 3 September 2026. By the end of 2025 and into early 2026, the economy was showing early signs of recovery after a period of weak activity, as set out in BEFU documentation.

The fiscal frame around those forecasts was set at Budget 2026, delivered by Finance Minister Nicola Willis. The Government pre-allocated just over $1 billion from the following year's Budget at the time of Budget 2026.

The broader context here is what PREFU does and does not change for the campaign and the next Cabinet. A broadly unchanged medium-term track limits the scope for competing claims of a structural break, while the composition has shifted. Exports and pre-conflict momentum are doing more work, households less, and housing is no longer contributing the wealth and residential investment impulse assumed in May. For fiscal strategy, persistent energy-led price pressure combined with softer consumption points to a narrower path for revenue and demand, and to pressure on operating balances if activity disappoints. Housing will bear watching, as lower migration, extra supply and higher rates feed through to consenting, construction employment and local government revenue at the same time as debt servicing remains elevated.