Source: Radio New Zealand
Economist Shamubeel Eaqub said there would be a wider inflation effect for New Zealand, beyond the increase in petrol prices that has already begun. Screengrab / Facebook
New Zealand’s economy is on a “precipice”, one economist says, as the country faces increasing pressure as a result of war in Iran.
The price of oil has almost doubled from where it was at the start of the year, pushing up fuel prices and creating the potential for inflation across a wide range of goods and services.
Economist Shamubeel Eaqub said there would be a wider inflation effect for New Zealand, beyond the increase in petrol prices that has already begun.
“The way to think about it is where it originates… essentially, the Middle East provides up to 80 percent of the crude oil to the main refineries we buy oil from in South Korea and Singapore. Already in Singapore, the refining crack spread – the difference between refined product versus crude, has increase from $3.5 to $35. That means 10c more at the pump, roughly. That’s the first wave.”
“The second is around how we use oil in so many parts of the economy. It’s true that for transport we’re far less dependent, that was the case in the past. But there are particular industries and regions that are very influenced by it. The biggest is, of course, aviation. I feel sorry for Air New Zealand… if you look at the aviation fuel prices, they have skyrocketed because it has to be processed from a particular type of crude.
“It’s all the transport sectors. It’s us driving cars, the diesel for our trucks, which is really the backbone of logistics in New Zealand is diesel. It comes through there.”
He said construction would be the most affected industry initially. “Paint, plastics, paint, chemicals, you name it. Everything is related or affected by the price of oil. Then it’s people like the agricultural sector, hugely affected through fertiliser, diesel… particularly dairy and horticulture.”
He said it could also have an effect on consumer risk appetite, which would influence air travel and tourism.
“If the conflict lasts longer, prices go up, it might damage demand for our goods and services that we export, which then turns to jobs and slows down an already precarious recovery that I hope we continue to have.”
ANZ chief economist Sharon Zollner told RNZ the increase in oil prices had been “quite exponential.”
“It’s a pretty substantial shock that is negative for activity and growth.”
She said it would be inflationary beyond the price of petrol because fuel was an input into “pretty much everything”.
“All goods generally need to be moved around,” Zollner said.
Sharp increases in gas prices led to higher fertiliser prices, which could affect food costs.
“There’s a train of thought that thinks of economics as energy transformed, that’s how important energy is. If it spikes up, then down again quickly, there’s no harm done. If it stays high, it’s a problem.”
ANZ chief economist Sharon Zollner says the increase in oil prices had been “quite exponential.” ABC / Luke Bowden
She said there was already evidence in surveys that businesses’ inflation expectations were increasing, which added pressure.
“We’ve seen the New Zealand dollar come off a couple of cents which makes not only oil more expensive but all imports.”
Finance Minister Nicola Willis said on Monday that there could be a range of potential consequences for supply chains, trade, inflation and future economic activity. She said the Commerce Commission had been asked to step up its fuel price monitoring.
What does it mean for interest rates?
How the Reserve Bank is likely to respond is not yet clear – it could be argued that it will need to increase interest rates to combat inflation, or decrease them to soften the blow to the economy.
“The kind of inflation we’re talking about is supply shock increases,” Eaqub said. “Which could become embedded if the economy is too strong. But the flip side is the economy might not be strong enough and we spiral. So we’re kind of in that precipice at the moment, just as the war is on a precipice.”
Zollner said the Reserve Bank would be weighing up the inflation effect against the fact it was bad for growth and employment if the war was sustained.
“People aren’t sure whether this makes the bank likely to raise rates sooner or later… It’s difficult for markets to deal with.”
Westpac chief economist Kelly Eckhold said petrol prices were on track to return to levels not seen since the invasion of Ukraine.
Beyond that, he said it seemed reasonable to expect inflation could pick up, but he did not think interest rates would follow quickly.
He said the Reserve Bank would probably view the increase as being for a finite period, and demand could be reduced in future because of it, as well as there being more pressure on household budgets.
“They’ll probably be thinking that if they look forward 18 months ahead, which is around about the period where a policy action now would have its impact, if anything, the issue might be a need to move interest rates the other way.
He said there was a risk that for the next three to six months the economic recovery would “take a pause”.
“Consumer confidence in particular, I think, is often related to changes in fuel prices because that’s a really frequently purchased item in the budget. So, you know, I can easily imagine that there might be a bit of a hiccup or a delay in the recovery that goes for a little while.”
Westpac chief economist Kelly Eckhold said petrol prices were on track to return to levels not seen since the invasion of Ukraine. Supplied / LinkedIn
He said it was not impossible that the government might act to cut the fuel tax again, as had happened last time petrol prices spiked. Eaqub agreed. Willis said on Monday that the Government was not considering it.
Infometrics chief forecaster Gareth Kiernan said it felt a bit like the 2025 US tariffs again.
“Suddenly, a whole lot going down overseas and any hopes of a recovery sort of getting hit in the kneecaps again.”
He said the longer the conflict continued, the worse it would be for the New Zealand economy.
But he was less convinced that it wouldn’t mean higher interest rates.
“There’s a real risk there with the economy.”
He said 10 years ago, businesses facing cost pressures tried to cut costs elsewhere.
“Whereas now you go and talk to businesses and there is still a sense that if cost pressures are coming through, we had no choice but to pass them on five years ago when everybody was in the same boat and everything was rising in price.
“But we feel like there’s a pretty good chance we could do that again… it hasn’t taken long for transport organisations, companies to be going, okay, I’ve got a fuel adjustment factor in place and you’re going to be feeling that from next week… There is a real risk that inflation does [pick up] and possibly that the Reserve Bank might just be a little bit slow to realise what’s going on.
“Which means, ultimately, they need to be raising rates sooner and probably further as well, despite the fact that economic growth and the economy are not in a particularly great space.”
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– Published by EveningReport.nz and AsiaPacificReport.nz, see: MIL OSI in partnership with Radio New Zealand
