New Zealand's economy will likely take a hit from higher fuel prices as a result of the Middle East conflict, ASB Bank said in a report as it lowered its 2026 gross domestic product forecast for the country by 1.6 percentage points to 1.3%.

The bank expects the economy to contract by 0.3% in the second quarter, with a direct hit to consumer spending, before recovering with 0.3% growth in the third quarter and a 0.9% expansion in the last three months of the year.

Higher fuel prices, uncertainty around fuel security, and flight cancellations will probably result in fewer tourist arrivals to New Zealand, and dairy farmers could become cautious on spending due to greater uncertainty and expected increases in costs over the coming season, ASB said.

While the bank does not assume any significant supply disruptions in New Zealand, it does expect "severe" disruption to the economy if the country fails to secure additional fuel deliveries and resorts to rationing.

It also expects overall inflation to peak at around 4% by mid-2026 before a return to sub 3% by 2027.