ASB economists say the worst may be mostly over for the New Zealand economy.
By Susan Edmunds of RNZ
They have released their updated economic forecasts for the quarter, and say easing oil prices are helping to improve the outlook and reduce the risk that the country is in for another prolonged inflation shock.
They said the outlook had improved "markedly" in recent months and had changed significantly from their March forecast.
"The New Zealand economy has shown greater resilience than many expected in the face of global uncertainty and higher fuel prices," chief economist Nick Tuffley said.
"While geopolitical risks remain elevated, falling oil prices have significantly reduced one of the biggest risks to growth and inflation this year.
"The signs were increasingly coming through that the economy was getting back on track in the second half of last year and the early parts of this year, right up until the war broke out in the Middle East. Now that the key disruption part looks like it's relatively short-lived, we do see that people will start getting back to normal, and making decisions and getting on with life as usual."
He said, while shipping through the Strait of Hormuz remained disrupted and energy infrastructure had been damaged, fuel prices had declined in recent months, reducing pressure on inflation and easing the squeeze on household spending.
"Higher fuel prices were starting to crowd out household spending and lift business costs across the economy. Those pressures are now easing substantially.
"Consumers are likely to feel more confident than they did earlier in the year and businesses have greater certainty about their cost environment."
Gross domestic product (GDP) increased 0.8% in the March quarter and there were signs that growth had been building at a stronger pace than previously thought.
"The recovery has not been derailed, but it has been delayed. Household spending, business investment and some export sectors are still feeling the effects of the oil shock, and the labour market remains soft."
Tuffley said fuel prices and heightened uncertainty would remain a factor through the middle of this year. Inflation, as measured by the consumer price index, was likely to rise to about 4.1% in the year to June, but would then ease through the second half of the year and into 2027.
ASB expects the recovery to continue gradually, supported by resilient commodity prices, recovering tourism and lower fuel costs, although geopolitical risks remain elevated. Dairy and meat export sectors continue to benefit from strong global demand, while tourism has recovered to 93% of pre-Covid visitor levels.
"The inflation outlook remains highly uncertain and depends heavily on developments in the Middle East, but the recent fall in oil prices means inflation now looks considerably less challenging than it did a few months ago," Tuffley said. "The outlook has improved, but uncertainty remains high.
"It would only take one significant geopolitical shock to reverse recent gains, so businesses and households still need to prepare for a range of possible outcomes. For now, though, the recovery appears to be back on track."
Tuffley said households should start to feel more positive, as the cost of filling up their cars fell.
"The other thing is that we really don't' like uncertainty as human beings. When we're faced with something where we've just got no idea how long it's going to go on for and when it will end, that makes us a bit more naturally cautious.
"While we know nothing is simple when it comes to try to end the sort of wars that we've seen, what does seem to be a lot more reassuring is that, one way or another, there will be enough of a deal to allow some degree of oil to flow and keep some of that downward pressure on oil prices.
"That is giving people a lot more certainty around their decision-making, whether you're a household or whether you're a business."
He said the Reserve Bank would probably worry less about inflation.
"The rush to lift interest rates as early as Wednesday doesn't look as compelling an argument right now. We think the Reserve Bank will wait until at least September, before it contemplates lifting interest rates."
He said the official cash rate was likely to go back to 3.25%.
"That's our best estimate of where that sort of Goldilocks neutral rate is."
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