It is still early days in terms of market reaction and the conflict, so assessing the possible fallout is inherently speculative.<\/p>\n
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.<\/p>\n
Even though tariffs didn\u2019t 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.<\/p>\n
Hopefully, the foundations of recovery are more solid this year.<\/p>\n
Kiwis will feel the most immediate economic impact of the Middle East conflict at the petrol pump. <\/p>\n
Oil prices rose as much as 13% as trading resumed early on Monday.<\/p>\n
But they eased back during the day.<\/p>\n
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).<\/p>\n
However, there is plenty of potential for it to rise further.<\/p>\n
Disruption to shipping through the Strait of Hormuz is the biggest problem facing the oil industry.<\/p>\n
CNBC reports more than 14 million barrels per day flowed through the strait last year. According to data from energy consulting firm Kpler, that\u2019s a third of the world\u2019s total seaborne crude exports.<\/p>\n
For now, the strait remains open but with heightened risk for oil companies.<\/p>\n
Meanwhile, Opec, the organisation of oil-producing nations, has already moved to increase supply to try to offset the supply shock.<\/p>\n
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.<\/p>\n
That could have inflationary implications for New Zealand.<\/p>\n
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\u2019s Consumer Price Index inflation rate.<\/p>\n
\u201cRight now we\u2019ve got a 2.6% inflation forecast for the June quarter, if there\u2019s a reasonably long-lived shock, that would be nudging it back up to that 3% level.\u201d<\/p>\n
The Reserve Bank would almost certainly look through any immediate supply-side inflation shock, he said.<\/p>\n
\u201cThe typical playbook here is that you downplay the short-term impact on inflation unless it starts to flow through to inflation expectations.\u201d<\/p>\n
That meant there was no immediate threat the Reserve Bank would need to lift interest rates any sooner.<\/p>\n
Most economists expect the Official Cash Rate to stay on hold at 2.25% until December.<\/p>\n
The Reserve Bank will focus on core inflation, which is a measure that excludes volatile food and energy prices. <\/p>\n
It would also be looking at the medium-term growth path, Eckhold said, and that was probably negative for New Zealand.<\/p>\n
In other words, the wider impact on global growth and demand could have implications for our exporters.<\/p>\n
New Zealand gets most of its fuel from Singapore.<\/p>\n
But Asia gets most of its fuel from the Middle East, \u201cso those industrial economies are quite exposed, and that could lead to weaker trading partner growth\u201d, Eckhold said.<\/p>\n
That could provide a headwind to local economic growth, keeping some downward pressure on domestic inflation.<\/p>\n
About three-quarters of the oil going through the Strait of Hormuz goes to China, India, Japan and South Korea. <\/p>\n
China, our biggest trading partner, receives half of its crude imports from the strait.<\/p>\n
There was also a risk to equity markets, although the reaction didn\u2019t seem overly dramatic at this point, Eckhold said.<\/p>\n
The NZX50 dipped sharply on opening this morning, off by 1.5%.<\/p>\n
By late afternoon the sell-off had eased, with the market off by less than 1%.<\/p>\n
There was an immediate reaction in currency markets with the typical \u201cflight to safety\u201d towards the US dollar in times of risk.<\/p>\n
That pushed the Kiwi down half a cent.<\/p>\n
\u201cIt\u2019s early days; the Kiwi\/US is at about 59.5c, you could argue it\u2019s in the trading range,\u201d Eckhold said.<\/p>\n
Wall Street has been volatile in recent weeks with rising concerns about the valuation of tech stocks.<\/p>\n
But historically, US markets have tended to look through geopolitical conflict with relatively minimal negative reaction.<\/p>\n
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.<\/p>\n
That would be felt locally via KiwiSaver accounts.<\/p>\n
A big dip in balances could be unsettling and have some impact on consumer confidence. <\/p>\n
So far, the market reaction had been relatively calm, Eckhold said.<\/p>\n
\u201cMy 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\u2019s plenty of potential to go wrong.\u201d<\/p>\n
But for now, it was a case of wait and see, he said.<\/p>\n
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.<\/p>\n