Source: Radio New Zealand
Higher fuel costs mean higher transport costs, and that means higher prices across the board – and that’s a hard pill to swallow for Kiwis three years into a cost-of-living crisis.
Kiwis are already feeling the expensive ripple effects of the war in Iran – and economists are warning that the real impact is only just beginning.
What started as a distant geopolitical conflict has quickly landed squarely on our country’s economy, driving up fuel costs, squeezing household budgets, and threatening to slow growth.
If it continues, New Zealand could be staring down the barrel of another recession.
“So this sort of shock, if it gets worse, will definitely increase the risk of a recession here,” Kiwibank chief economist Jarrod Kerr tells The Detail.
“And we have only just gotten out of recession, so to fall back in would be horrendous for households and businesses.”
At the centre of the crisis is oil.
Global prices have surged past US$100 a barrel as fighting disrupts supply routes through the Strait of Hormuz – a chokepoint for about 20 percent of the world’s oil.
And for New Zealand, which imports almost all of its fuel, the effect has been immediate.
Petrol prices are already climbing rapidly, with forecasts that they could push toward $4 a litre – or higher – if the conflict escalates.
And when fuel costs rise, everything that relies on transport follows – from groceries to clothing to construction materials.
“The direct impact that we are seeing right now is the rise in petrol prices, and that affects, I would say, every household, particularly those on lower incomes who are forced to drive to work,” Kerr says.
“It is just another cost that they have to wear. And they have been in a cost-of-living crisis for the past three years.”
He warns that the conflict could push inflation higher while slowing growth, with Kiwi households already tightening spending, cutting discretionary purchases, and reducing travel and fuel use. Delaying big buys and trading down to cheaper brands are likely on the horizon.
“Yes, we are going to see a spike in inflation, but what I don’t agree with is the commentary that that automatically leads to a rate hike. I disagree.
“That is only going to put greater pressure on a household that is already under pressure. That would be the exact thing not to do … for me, the bigger risk is that households get hurt, the economy doesn’t recover, and the central bank may be needed to come in and provide support.”
He said economists entered the year “quite optimistic, because we had been banging the table for a long time, because the Reserve Bank had not cut interest rates to a level that was actually stimulatory and helpful for the recovery.
“They finally got there in November last year, took them far too long to get there, but they got there. We came into this year saying, ‘this is it, we are going to recover, the settings are about right, let’s go, c’mon let’s get some growth happening’, and mid-way through that sentence, we were cut off with missile strikes in Iran.
“It’s just another international shock that we have to deal with, and it’s just another headwind that all households and businesses have to face into.
“It’s hard for households to pay the food bill and power bill, which is up 35 percent on the year, petrol prices, which will be up a similar sort of amount, it is very, very difficult.
“We need to see policymakers stepping in to help, not hinder. So calls for rate hikes from the RBNZ [Reserve Bank] are tone deaf.”
On this episode, The Detail also speaks to Retail NZ chief executive Carolyn Young, who says retailers and consumers throughout the country are feeling the fallout of the war.
She says prices for goods and services will increase and “we will see that relatively soon”.
“We are seeing increases in insurance … increases in the fuel to get the ships to New Zealand,” she says. “Those additional costs are being passed on to the retailers and, at some point, those costs will be passed on to consumers.”
She says, right now, it’s “a really uncertain time for everyone”.
“Ultimately, uncertainty is not good for business. And I think that’s the thing we have to remember, and right now everyone is in a state of flux and uncertainty.
“And for any business owner, whether you are a retailer or other business, it’s going to have an impact on your sense of how you are going to move forward, and therefore it will have an impact on your profitability and ability to spend money in other areas.”
She fears some businesses might not survive the war.
“It will be difficult for people, and we will see some people who are perhaps a bit more pessimistic about what the future holds and may decide to close the store, and there will be others who will try to hang in there.”
She says recovery will depend on how long the conflict lasts.
Economists say a short conflict will see a sharp but temporary spike in prices, while a prolonged war will mean sustained inflation, weaker growth, and reduced spending.
And an escalation? Enter the risk of recession.
For now, the message from economists is simple: New Zealand may be far from the conflict, but it is not insulated from its consequences, because a war a world away involving oil doesn’t stay overseas for long.
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– Published by EveningReport.nz and AsiaPacificReport.nz, see: MIL OSI in partnership with Radio New Zealand