It is still early days in terms of market reaction and the conflict, so assessing the possible fallout is inherently speculative.
But perhaps the biggest risk, as we saw with tariff shock a year ago, is that turmoil delivers an outsized shock to local confidence at a time when the recovery is gaining traction.
Even though tariffs didn’t have a significant impact on local export earnings, concern about possible fallout played a part in the second-quarter economic contraction that derailed the recovery last year.
Hopefully, the foundations of recovery are more solid this year.
Kiwis will feel the most immediate economic impact of the Middle East conflict at the petrol pump.
Oil prices rose as much as 13% as trading resumed early on Monday.
But they eased back during the day.
As at 5pm, Brent crude (the benchmark for local pump prices) was up 5.8% from the closing price on Friday (at US$77.08).
However, there is plenty of potential for it to rise further.
Disruption to shipping through the Strait of Hormuz is the biggest problem facing the oil industry.
CNBC reports more than 14 million barrels per day flowed through the strait last year. According to data from energy consulting firm Kpler, that’s a third of the world’s total seaborne crude exports.
For now, the strait remains open but with heightened risk for oil companies.
Meanwhile, Opec, the organisation of oil-producing nations, has already moved to increase supply to try to offset the supply shock.
If Iran can target shipping and effectively close the strait, some industry commentators warn it could send oil prices above US$100 ($167) a barrel.
That could have inflationary implications for New Zealand.
Westpac chief economist Kelly Eckhold said a rough metric was that for every US$10 a barrel of oil rose, it added 0.1% to 0.2% to New Zealand’s Consumer Price Index inflation rate.
“Right now we’ve got a 2.6% inflation forecast for the June quarter, if there’s a reasonably long-lived shock, that would be nudging it back up to that 3% level.”
The Reserve Bank would almost certainly look through any immediate supply-side inflation shock, he said.
“The typical playbook here is that you downplay the short-term impact on inflation unless it starts to flow through to inflation expectations.”
That meant there was no immediate threat the Reserve Bank would need to lift interest rates any sooner.
Most economists expect the Official Cash Rate to stay on hold at 2.25% until December.
The Reserve Bank will focus on core inflation, which is a measure that excludes volatile food and energy prices.
It would also be looking at the medium-term growth path, Eckhold said, and that was probably negative for New Zealand.
In other words, the wider impact on global growth and demand could have implications for our exporters.
New Zealand gets most of its fuel from Singapore.
But Asia gets most of its fuel from the Middle East, “so those industrial economies are quite exposed, and that could lead to weaker trading partner growth”, Eckhold said.
That could provide a headwind to local economic growth, keeping some downward pressure on domestic inflation.
About three-quarters of the oil going through the Strait of Hormuz goes to China, India, Japan and South Korea.
China, our biggest trading partner, receives half of its crude imports from the strait.
There was also a risk to equity markets, although the reaction didn’t seem overly dramatic at this point, Eckhold said.
The NZX50 dipped sharply on opening this morning, off by 1.5%.
By late afternoon the sell-off had eased, with the market off by less than 1%.
There was an immediate reaction in currency markets with the typical “flight to safety” towards the US dollar in times of risk.
That pushed the Kiwi down half a cent.
“It’s early days; the Kiwi/US is at about 59.5c, you could argue it’s in the trading range,” Eckhold said.
Wall Street has been volatile in recent weeks with rising concerns about the valuation of tech stocks.
But historically, US markets have tended to look through geopolitical conflict with relatively minimal negative reaction.
Still, if the conflict were to broaden or continue for an extended period, the implications for the US economy could cause a broader sell-off.
That would be felt locally via KiwiSaver accounts.
A big dip in balances could be unsettling and have some impact on consumer confidence.
So far, the market reaction had been relatively calm, Eckhold said.
“My sense is that people seem quite relaxed, and I think that is remarkable given this is probably the biggest thing in that part of the world [since the Iraq war]. There’s plenty of potential to go wrong.”
But for now, it was a case of wait and see, he said.
Liam Dann is business editor-at-large for the New Zealand Herald. He is a senior writer and columnist, and also presents and produces videos and podcasts. He joined the Herald in 2003.
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