Nick Tuffley: ASB Chief Economist on worst case scenario for NZ economy from Iran War

So the war scenario is Treasury reckons under worst case scenario, which is the conflict

lasting until the end of the year with elevated oil prices and inflation could hit 3.7%

currently 3.1.

Nicola Willis though doesn't think that's too bad.

That's too high for my liking, but it's lower than Australia has today, currently at 3.8.

The reason I share this point with you is to emphasise that New Zealand does enter

this period of unavoidable international cost pressures from a stronger position than

some other countries.

There's also no actual fuel shortage at Nick Tuffly ASB Chief Economist with us, Nick.

Good morning.

Good morning.

So what did you make of the plan?

I mean, inflation, yeah, it looks bad, but as the minister says, still less than Australia

and we would presumably see some demand come off if price oil prices rose, would we not?

Well, you likely would with a sharp lift in prices like this.

Look, put it in context, so if you did have oil prices remaining high for the rest of the

year, as the finance minister said, look, you've got to have inflation in the high

three, and it would remain until 3% something until next year.

But look, we saw in 2022 inflation pretty quickly hit 6% when we had a pretty sharp

lift in oil prices back then, much sharper lift.

And we had five percent inflation back in 2008 when we had a lift in oil prices, which

also coincided with a lift in food prices as well.

Very hard to get rid of once it kicks in, isn't it?

That's the challenge for the Reserve Bank is what it will be watching for is not just

the sort of short term immediate lift that we see at the pump.

It's also the flow on through the transportation sector and then if the costs get embedded.

And really importantly, it's the Reserve Bank will worry if our behavior changes, if we

start going, well, here we go again, 7% inflation, and our behavior starts to shift in

a way that entreatures inflation, it just makes it a bit more difficult to bring it down.

So what does the government do?

Because politically, if they went out and relieved a whole bunch of people at the pump and

spend a bunch of money at a time when inflation's going up, it would be pretty dumb for them.

But economically, would that be a smart thing to do or not?

Well, it's pretty hard to avoid a shot like this.

So there's a big shock, it's affecting a lot of countries, it does mean that you get

a combination of higher prices, but also, no, it's slower consumer spending than otherwise

because that gets crowded out as well.

So you can't wave a magic wand.

The best thing the government can do is either look to offset the impact on lower income

households who are going to feel more of a squeeze from it and also just try and see

what it can do to help the industry to smooth out any sort of supply disruption.

And the biggest impact, potentially, is actually running out of fuel and needing to either

ration it or see the economy hit harder than just merely having to deal with higher prices.

Which we're told is that at least weeks away from happening, Nick, appreciate your time

this morning.

As always, Nick Tuffley, ASB Chief Economist, it is...