“If that does remain the case, we face some significant short-term challenges and heightened medium to long-term risks.”
Scenario two would play out if activity in the strait was constrained for a prolonged period, and oil reached US$135 a barrel in Q2 and Q3. Scenario three included capacity through the strait at 10% of normal levels through Q2 and Q3, pushing the price per barrel to US$180 and “long-lasting damage and flows do not recover for four or five years”.
Willis stressed these were scenarios, not Treasury’s forecasts.
Willis also stressed her confidence in a rejuvenated economic recovery for the country.
She made the comments in an economic update from Parliament this afternoon amid warnings from the Reserve Bank that ongoing geopolitical instability is expected to increase inflation and weaken economic recovery.
Willis’ update comes weeks before the Budget, which is to be delivered on May 28.
She told those gathered: “Economic recovery is delayed but not derailed.
“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.”
Willis said “the choice is really clear”.
New Zealanders could either opt for a Government that had fiscal discipline and “cares about your future and your kids’ future”, or support politicians she claimed “want to pull the wool over your eyes and tell you that the answer is just spending more”.
Willis shared the three scenarios Treasury had prepared over the ongoing Iran conflict and the impact it could have on the economy.
A widening conflict in the Middle East has led to dramatic swings and surges in the price of fuel for ships, prompting distributors in Singapore, the world’s top bunkering hub, to cut back their purchases. Photo / Getty Images
“Scenario one looks the most likely,” she said.
She said in that scenario, the worst predicted quarter for growth is the second quarter of the year, which we’re in now.
“We would expect to see unemployment recovering in the future,” she said.
Willis said of the scenarios: “What it does show you is that while we face significant short-term challenges and heightened medium to long-term risks, we also hold out the hope that oil will gradually resume flowing through the Strait of Hormuz in the second half of this year. We obviously can’t take that for granted.”
Willis said there is still a huge amount of uncertainty about the ceasefire between America and Iran.
In the latest Official Cash Rate (OCR) monetary policy update, the Reserve Bank opted to keep the rate on hold, saying that it balanced the benefits of responding pre-emptively with the cost of unnecessarily stifling the economic recovery.
“In the near term, inflation is expected to increase and the economic recovery to weaken,” the Reserve Bank said.
Conflict in Iran had disrupted global supply chains, prompting oil and fuel prices to increase significantly.
Willis said it was important to be “open and transparent” and not fudge around the fact that if oil prices got “really high”, that inflation could “get really bad here”.
But Willis said in terms of future orders, fuel importing companies are telling the Government that their orders are secure through until the end of May.
She said these companies have told them that they are not having challenges placing future orders into June.
In addition, New Zealand’s Consumers Price Index increased 3.1% in the 12 months to the March 2026 quarter, according to figures released by Stats NZ on Tuesday. This was higher than most economists’ estimates and has, according to market pricing, lifted the odds of an OCR hike in May.
Finance Minister Nicola Willis (inset) says it is important that the Government has been up front about the impact the oil crisis is having on the economy. Photo / New Zealand Herald composite image
Yesterday, rating agency Moody’s downgraded New Zealand’s financial outlook to negative, although affirmed New Zealand’s AAA credit rating.
Willis said New Zealand’s economic recovery had been harder than what had been forecast a few years ago.
“The impact of that has been not only to New Zealanders and their jobs and livelihoods, but also to government books.
“And so, what Moody’s is saying is it’s really important you stick to those goals of getting the books in balance and bending the debt curve down,” she said.
“I think that what they worry is that future politicians will take their eye off those really important targets,” Willis said.
She said some people, amid the ongoing economic turmoil, might call for the reduction of funds going into new hospital developments.
But Willis said: “I have to look the New Zealanders in the eye who are waiting for hip operations, who need cancer treatment, and tell them there’s not more money for the hospitals. I’m not prepared to do that.”
Budget warning: Economist wary of pending package
Infometrics’ principal economist Brad Olsen warned that Willis’ Budget next month was not “going to look great” and believed the country’s much-promised return to surplus could be pushed out by another year.
“Inflation pressures also persist, including fuel price increases, stubborn non-tradeable housing costs and utility prices, and higher electricity costs,” the agency said in its report late yesterday.
In March, ratings agency Fitch also downgraded New Zealand’s outlook from stable to negative, citing debt reduction concerns.
Willis has already said this year’s Budget would be “responsible” where there would be “no splashing of cash”.
Julia Gabel is a Wellington-based political reporter. She joined the Herald in 2020 and has most recently focused on data journalism.