New data has indicated that the New Zealand economy was picking up before the fuel prices spiked in late February this year.
Economic growth was in line with expectations in the March 2026 quarter, at 0.8 percent, and there was an upward revision to the December 2025 result from 0.2 percent to 0.5 percent (both figures seasonally adjusted). Activity in the March quarter was 1.6 percent higher than a year earlier, the strongest annual growth in two years.
Growth was underpinned by a bounce in private sector business investment (up 2.5 percent from the December 2025 quarter) and continued increases in government consumption (up 1.5 percent over the same period). Exports also rose by 3.1 percent from December, but this positive effect was offset by a 4.2 percent lift in import volumes (all figures seasonally adjusted).
Key contributors to the lift quarterly in investment were plant, machinery, and equipment, up 5.5 percent and driven by computer investment; transport equipment, up 6.7 percent; and other construction, up 4.8 percent. However, lower levels of residential and non-residential activity continue to weigh on the broader construction sector, with declines of 3.1 percent and 3.4 percent respectively (all figures seasonally adjusted).
This growth in investment spending was reflected in import volumes, with large increase in imports of capital equipment (13 percent) and passenger cars (16 percent) from a year ago. However, growth in imports was more broad-based than that, with sizable annual increases in imports of intermediate goods (8.5 percent), consumption goods (6.1 percent), and services (8.5 percent).
Household spending remains one of the softer parts of the economy, despite a 0.5 percent quarterly lift in the March quarter (seasonally adjusted). Notable increases in the March quarter were a 3.1 percent lift in spending on transport and a 0.9 percent rise in food and non-alcoholic beverages (both figures seasonally adjusted). However, spending on communication remains under considerable pressure, with a 2.6 percent quarterly seasonally adjusted fall the largest in 20 years, and an annual spending increase of just 0.5 percent on housing and household utilities was the slowest in 30 years.
On the production side, results continue to be varied across industries. Key contributors to quarterly growth in March were professional, scientific, and technical services (up 1.4 percent); wholesale trade (up 2.4 percent); agriculture (up 2.2 percent); transport, postal, and warehousing (up 4.1 percent); and health care and social assistance (up 1.0 percent). However, sizable falls were recorded by arts and recreation services (down 6.8 percent); mining (down 12 percent due to a large fall in gas extraction); construction (down 1.0 percent); and information media and telecommunications (down 1.4 percent, all figures seasonally adjusted).
Gareth Kiernan, Chief Forecaster and Director at Infometrics, said this GDP data aligns with other economic indicators, showing that the New Zealand economy was gradually building momentum prior to the Iran War, which began at the end of February this year. He said businesses were investing more in anticipation of better demand conditions, and imports were lifting in response to this demand as well as an expected acceleration in consumer spending.
Amid this pick-up, the sluggish housing market, still-declining construction activity, and patchy consumer confidence continued to cloud the outlook somewhat. Despite the 0.5 percent quarterly lift in household spending, annual growth of 0.9 percent was the weakest result since the end of 2024.
Kiernan added that Parts of the export sector remain of concern, with a lift of just 0.8 percent pa in goods exports in the March quarter, compared with a 15 percent pa surge in services exports. Key areas of weakness for goods exports include meat products (-5.6 percent pa); coal, crude petroleum, minerals, and ores (-19 percent pa); wood and paper products (-8.1 percent pa); and other food, beverages, and tobacco (-1.8 percent pa).
“Significant falls in business and consumer confidence due to the Iran War, sharply higher fuel prices, and the prospect of rising interest rates are likely to lead to a contraction in economic activity in the current June quarter,” he said.
Kiernan said that news of a peace deal between the US and Iran has seen Brent oil prices drop below USD 80/bbl for the first time since early March. Domestic fuel prices, particularly for diesel, continue to track lower than had been expected. May price data from Stats NZ also suggests that June quarter consumer price inflation will be lower than previously feared, now expected to be around 4.2 percent pa.
“Interest rates still look likely to rise throughout the second half of this year,” said Kiernan.
“However, the above factors all suggest that the Reserve Bank might not need to lift the official cash rate further during 2027 as much as had been thought previously. Signalling of a more moderate tightening in monetary conditions by the Bank over the coming months could be key to fostering a recovery in confidence and economic activity in the latter part of 2026.”
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