Uncertainty over Britain's possible exit from the European Union weighed on markets yesterday as a NZIER report said "carnage" caused by a Brexit was likely to harm New Zealand firms.
The S&P/NZX50 Index closed down 89.33 points, or 1.3 per cent, to 6834.94 with next week's vote cited as the reason for the selloff. Across the Tasman the S&P/ASX200 closed down 2.1 per cent at 5203.3.
Polls in Britain point to a vote to leave the EU and the NZIER said that would harm New Zealand's exports.
"The post-Brexit picture is horribly murky. No one knows precisely how it might play out, especially after the two-year withdrawal period lapses." said the institute's deputy chief executive, John Ballingall.
"But when the smoke clears, the most obvious impact on New Zealand of a Brexit vote will be on our exports to the UK, which could drop by $190 million per year due to slower UK income growth."
The vast majority of studies into the impact of a Brexit point to a slowing in Britain's economy relative to a business as usual situation of up to 5.5 per cent in GDP by 2020 and up to 7.5 per cent in 2030.
Britain takes $1.7 billion, or 3.4 per cent, of NZ's goods exports, with important items being sheepmeat, wine, apples and pears, wool and honey. Most primary products enter the UK under preferential arrangements negotiated with the EU.
Hear Business NZ's Kirk Hope speak to NewsTalk ZB's Mike Hosking about the potential risks and benefits to our economy of a UK exit from the European Union:
Slower income growth would harm the $1.05 billion British tourist market as people delayed long-haul travel until conditions improved.
The NZIER said a best-case scenario for NZ would be a quickly negotiated bilateral free trade deal cutting tariffs on industrial goods and perhaps expanding quota access for key agricultural products such as lamb.
"But it's hard to see New Zealand being near the top of the UK's list of potential FTA partners."
A more likely scenario would be existing market access not improving in the short term.
Why is Brexit important to New Zealand?
New Zealand and Britain also had a substantial investment relationship, with more than $4.2 billion of British investment in New Zealand.
"We might expect UK investors to become more risk-averse while the Brexit carnage plays out, and that could limit the extent to which they see investment in New Zealand as a priority," Ballingall said.
There could also be challenges for Kiwis wanting to work in Britain if the political environment becomes more nationalistic.
"Brexit would also be a further stinging slap in the face of ongoing economic integration initiatives at a time when the political discourse is already turning against deeper trade liberalisation."
Ballingall said with the vote overnight next Thursday, the only certainty was uncertainty.
Other Brexit impacts include:
• Investment into New Zealand could soften
Since New Zealand is rarely seen as a low-risk investment destination due to our small scale, geographic location and susceptibility to global economic shocks, this could see a marginal dampening of investment flows into New Zealand.
• People flows could be affected
We could expect fewer job opportunities to be available in the weaker UK economy, and potentially stricter entry requirements.
• May dampen enthusiasm for further integration
Should Brexit occur, this will send a message - no matter how jumbled - that a major developed country has withdrawn from a major integration initiative, preferring instead to try and make its own way in the world.
• New Zealand's export industry could see competition
An exit will likely push up the costs of goods and services exported and imported along the global value chains in which UK and New Zealand firms participate.
This is because the UK will no longer be able to export to and import from the EU and its FTA partners duty-free.
See NZIER's full Brexit report below: