New Zealand may face recession, economists warn.
By Susan Edmunds for rnz.co.nz
Stagflation describes a situation in which the economy experiences an unpleasant combination of inflation, high unemployment and stagnant economic growth.
This could happen as a result of the Iran war because high fuel prices are expected to cause high inflation, while the effect of those costs increases and widespread uncertainty can slow down economic growth.
Mike Jones, the BNZ’s chief economist, said it was a “stagflationary concern” because it undermined growth prospects and put pressure on disposable incomes and corporate incomes at the same time as raising inflation.
“We are also vulnerable when the economy goes into this and it was just starting to find its feet,” he said.
“There are buffers out there – mainly high import prices and the depreciation of the NZ dollar – but it is unlikely that they will be enough to prevent a decent hit to the economy. I think that, at this time, it is a matter of the recovery being damaged or stopped for a quarter or two, rather than slowing down. Growth is slow but growing.
“But there are still many conditions at play. A lot depends on how long the conflict lasts.”
Gareth Kiernan, chief executive of Infometrics, says stagflation was discussed as a prospect three or four years ago but never materialised.
“It was inflation followed by ‘we need a recession to recover’.
“I feel like this time is a little bit different because it’s a supply scare, that’s going to drive up prices and, two, it’s going to hurt growth.”
He said that the businesses had told him that they should pass the prices.
“I’m not talking about the transport companies setting their prices. I’m talking about everyone who uses transport services and now they’re forced to raise their prices, because we’ve had an economy that for the last three years has been on the sidelines. And people are cutting, they’re cutting, there’s nothing left.”
He said that although the Reserve Bank had expected that a small price increase would be passed due to weak demand, that is not the full picture.
“Sure, there’s no demand, but you’re going to raise prices instead of going to the wall because you don’t have any money left.”
He said that even if the situation can be resolved immediately, there will be further consequences for up to four months.
“Who knows where oil prices will stay… you can’t expect that maybe they can go back to US$70 a barrel… there has to be more risk associated with that. But the longer the period, the greater the impact in terms of delaying or preventing economic recovery.
“It’s almost a repeat of 2025 where we had a rate hike that hit us and knocked confidence and therefore knocked growth.’ and this looks the same again, except perhaps worse, being biased.”
But Westpac’s chief economist, Kelly Eckhold, says he still expects some economic growth this year – although there is a chance that could change.
“In the forecast we put out a few days ago, that assumed things would improve within a month. If that doesn’t happen then things get dark fast. The level of confidence in the forecast is very low right now because there are so many unknowns.
“You can’t discount that opportunity [of less economic growth]. The only thing is that we are coming from the beginning where we expected a very solid year. So, we have to fall before you get into that negative growth environment that we had back in 2024.”
The biggest concern is how long the conflict has lasted, he said.
“We have to remember that a lot of damage has already been done, and it will not be repaired quickly. There may also be a risk of premia built with concerns about the availability of fuel, prices… I am very worried. I think this is a very serious situation.”
He said the low exchange rate would drive up the cost of imports and make overseas travel more expensive for New Zealanders. But it was good for exporters.
“Nobody in New Zealand can protect us from the loss of livelihoods caused by this fear. The government can’t buy our way out of this. They can cut corners for the most vulnerable. But in the end, it’s only the cost that will give us money.
“The way out of this is to have the foreign sector finally be able to export our way out of this. And the low exchange rate is part of the transition that enables that to happen.”
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