The Finance Minister is adamant New Zealand’s economic recovery has been delayed, but not derailed, by the war in Iran.
Nicola Willis has shone a light on the country’s economic outlook in the lead-up to next month’s Budget.
Treasury last month developed three scenarios to estimate how the conflict will affect the country’s economic activity, which depends on how long and severe the disruption to oil moving through the Strait of Hormuz is.
The best-case scenario is a short conflict with oil flow through the Gulf gradually resuming and oil prices averaging US$110 ($188) a barrel. For context, this looks the most likely given since these estimates were developed, given that oil prices have reduced to US$102 a barrel.
It does still mean New Zealand would face some significant short-term challenges and heightened medium- to long-term risks. Treasury has inflation reaching 3.9%, growth falling back to 2% and the unemployment rate at 5.3%.
Willis has stressed that these are not the Treasury’s forecasts. Treasury has “reopened” the forecasts for this year’s Budget, so Cabinet will make its final fiscal decisions in the next few weeks.
A prolonged conflict with oil prices averaging US$135 a barrel would result in oil flow gradually recovering by the end of 2027. A prolonged and more severe disruption would occur if oil prices reach US$180 on average by the end of the year, and the flow doesn’t fully recover for another four to five years.
NZ Herald business editor at large Liam Dann told The Front Page that the longer the conflict continues, the more it embeds itself into the economy.
“Treasury’s saying 3.9% for inflation. Other economists are saying 4.2 or 4.3%. I think Westpac has warned of a peak of 4.5% in the second quarter. That’s the inflation from the immediate supply shock.
“The problem is if it continues, it starts to embed itself into the economy. People pass on the price pain, and it works its way through the economy into the core inflation or secondary inflation areas.
“Those are a problem for the Reserve Bank. They’re the ones that the Reserve Bank can do something about. It can’t really do anything about global oil prices, and that’s where they’ve warned that they’ll move to lift interest rates if they see it starting to get embedded.
“When you look at some of the forecasts from economists, they’re expecting about three rate hikes this year. So that’s, for example, July, September, and October rate hikes, 25 basis points each time to take us to 3%.
“That is, more or less, indicating that they are thinking that’s gonna happen to some extent or that the Reserve Bank will want to hit it off like the IMF has suggested they do,” he said.
Credit rating agency Moody’s reaffirmed New Zealand’s AAA credit rating, but has downgraded its outlook to negative, indicating a potential future downgrade if debt trajectories are not improved.
Willis has pointed out that New Zealand is still one of only 11 countries in the world to have the highest Moody’s rating, but that the revision to have us on watch is confirmation “that the Government’s response to the fuel crisis and its wider approach to the economy is the right one”.
“I am very conscious that many New Zealanders would like to see us splashing the cash right now, and I would love to ease the pressure that many people are feeling.
“We simply can’t do that responsibly as a country right now because we cannot just keep spending more and borrowing more as some have suggested.
“If we do that, this credit rating agency is confirming that we would risk higher interest rates, higher borrowing costs, which would put more pressure on Kiwi families and would weaken our economy in the future,” she said.
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The Front Page is a daily news podcast from the New Zealand Herald, available to listen to every weekday from 5pm. The podcast is presented by Chelsea Daniels, an Auckland-based journalist with a background in world news and crime/justice reporting who joined NZME in 2016.
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