Treasury’s hope for rapid return to normality hard to reconcile with the current outlook
Monday, 4 May 2026
ANALYSIS: Economists expect figures due out on Wednesday will show official unemployment didn’t fall in the first three months of the year.
That would scotch their earlier hopes, before the conflict in Iran, for a small improvement.
ANZ senior economist Miles Workman says the March quarter data is unlikely to reflect much of the knock-on impact on jobs of higher fuel prices or the drop in business confidence from the near closure of the Strait of Hormuz.
ASB and BNZ are, nevertheless, tipping a slight rise in the unemployment rate to 5.5%, with ANZ and Westpac expecting it to hold steady at 5.4%.
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Employment prospects may deteriorate further as businesses hunker down for what looks like a slow choke from higher fuel costs, weaker sentiment and rising retail interest rates.
ANZ’s monthly business confidence survey, released on Thursday, showed businesses expected to shed staff on aggregate in the months ahead as they ran into what the bank described as a “wall of worry”.
A net 2.7% of businesses expected to reduce their workforces over the coming year, marking the first time that metric had fallen into negative territory since mid-2024.
The survey also showed inflation expectations jumping significantly, with firms on average predicting annual inflation of just over 3.8% in April next year.
The previous survey had inflation expectations in March next year sitting at just under 3.1%.
Against that backdrop, the three scenarios that the Treasury has sketched for how the Middle East conflict could play out in the economy in the medium-term appear pretty optimistic.
It has forecast inflation could sit anywhere between 3.9% and 7.4%, and unemployment between 5.3% and 5.7%, in the current quarter — depending on how closely events in the Middle East followed one of three scenarios it modelled.
As Finance Minister Nicola Willis has emphasised, oil prices have so far been tracking roughly in line with the most benign of those models, which assumes oil will average US$110 a barrel in the current quarter and drop to pre-conflict levels early next year.
The former may not be out of the question and according to the Treasury, would mean 3.9% inflation and 5.3% unemployment in the current quarter — fine, perhaps.
What seems less likely is Treasury’s expectation that inflation could drop all the way down to 1.5%, unemployment could fall to 4.7% and economic growth climb to a very respectable 3.4% by June next year.
The Treasury may be assuming that a re-opening of the Strait of Hormuz would be followed by an oil glut as shipments that had been trapped in the Gulf were released to refineries.
But a quick retreat in oil prices may not be on the cards, still less such a rapid reduction in inflation and speedy return to economic normality.
The deadlock in the Middle East appears as entrenched as ever.
The International Energy Agency has warned 20% of Gulf oil production might not come back online quickly after any end to the conflict and it might be that some of that never fully resumes.
Even in the event of a clear and conclusive end to the conflict — which currently seems hard to envisage — countries that have run down their oil reserves will presumably want to replenish them to at least their original levels.
So it is not surprising that some overseas analysts are instead predicting elevated oil prices well into, if not throughout, 2027.
And that may be the best case scenario.
ANZ’s confidence survey suggests there is no way that won’t be built into longer-term inflation expectations — and indeed that this is already happening.
That, in turn, sets the scene for a rapid pivot from the Reserve Bank.
Forecasters including ANZ and Infometrics are predicting three rises in the Official Cash Rate (OCR) this year, with ASB forecasting four.
But given the rate currently sits at 2.25% — which HSBC economist Paul Bloxham assesses as “well below neutral” — even that might not be enough to bring inflation back within its target band in the medium term.
A return to 3.4% annual GDP growth in those circumstances would seem heroic.
It would be misguided to put too much emphasis on monetary policy when the underlying economic problem is an overseas war and supply crunch, but Willis and Reserve Bank governor Anna Breman certainly picked their moment to start shining more of a spotlight on the central bank’s machinations.
From now on, under a policy intended to increase transparency, the bank’s monetary policy committee will reveal how its members voted if they are unable to agree where to set the OCR and will be freer to speak publicly about their views.
The monetary policy statement the bank will release on May 27 is shaping up to be one of its most challenging and potentially divisive.
The bank’s job is to smooth out the peaks and troughs in economic activity. But there is not much smoothing to be done when the only thing on the horizon is a gently downward slope.