Treasury says recovery is delayed but still on track

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

The assessment is in the Pre-election Economic and Fiscal Update (PREFU), Treasury's pre-election check of the economy and the books. The forecasts were finalised in mid-August and reported on 29 September 2026. Treasury said the medium-term outlook is broadly unchanged from May's Budget, despite higher oil prices and weaker household spending, 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 update (BEFU). Treasury said stronger momentum before the conflict and a strong export sector helped offset the drag from energy costs.

The near-term picture is weaker. Treasury expects business investment was held back in the June quarter by uncertainty and cost pressure, before recovering later in 2026. That timing is in line with Budget forecasts. Household spending is weaker, reflecting higher oil prices being passed through to shoppers.

The jobs track is little changed. Treasury forecasts unemployment will fall from 5.6 percent to 4.3 percent by 2030, in line with BEFU.

On prices, Treasury forecasts 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 energy prices staying high for longer could keep inflation up and weaken activity. The Parliamentary Library noted the Reserve Bank expected annual inflation to peak at 4.3 percent in the September 2026 quarter, while OECD material noted higher energy prices were expected to lift near-term inflation but also weaken the recovery. The Reserve Bank left its policy rate unchanged at 2.25 percent in April 2026.

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

That is a change from the May baseline. In BEFU 2026, published on 28 May, Treasury forecast house prices would grow by 3 to 4 percent a year on average over the forecast period, according to Treasury. In the Half Year Update in December 2025, it had forecast home building would pick up, helped by lower interest rates, rising house prices and higher net migration. Treasury published a further Fortnightly Economic Update on 3 September 2026. By late 2025 and into early 2026, the economy was showing early signs of recovery after weak activity, as set out in BEFU papers.

The spending plan around those forecasts was set in Budget 2026, delivered by Finance Minister Nicola Willis. At that Budget, the Government set aside just over $1 billion from the next year's Budget in advance.

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 leaves little scope for claims of a major break, while the mix has shifted. Exports and pre-conflict momentum are doing more of the work, households less, and housing is no longer adding the wealth and building boost assumed in May. In practical terms, the jobs path points to spare capacity being taken up gradually rather than a sudden tightening, with wages and workforce participation to be tested against what happens. For the Budget, ongoing energy-driven price pressure with softer spending points to a tighter path for tax revenue and demand, and pressure on the operating balance if activity disappoints. Housing will bear watching, as lower migration, extra supply and higher rates flow through to consents, building jobs and council revenue while debt servicing stays high.