Paul Bloxham: HSBC chief economist on what the oil price increases mean for both sides of the Tasman

With us right now we have Paul Blox and HSBC's Chief Economist. Hello, Paul.

Good day.

Right, so where are we at with what you think the impact of the Iran war will have?

What the impact will be on the Australian and the New Zealand economies?

Well, I think it's quite clearly drive inflation to be higher and it's going to

weaken growth at the same time. This is not a good story, of course.

But it really isn't a good story. I mean, it's a constraint on the supply

systems that we need to grow economy, oil, gas, fertilizer.

There's a whole collection of commodities that come out of the Middle East and, of course,

the price of them's gone up. We're almost pertinently, most clearly.

And petrol prices are up sharply. Diesel prices are up sharply on the back of it.

That will slow down growth in the economy because it's a key thing that we need.

But at the same time, it'll lift inflation. I think the tricky question is going to be for central banks for the RBA and the RBNZ

exactly how they respond to all of this because it's obviously pretty challenging when you've

got inflation that goes up and growth that's likely to slow down.

Do you still think, I mean, I see ASB put out a note yesterday saying we're still

going to get about 1.3% growth across the year. Can we still count on some growth? No recession.

Also, I think that the challenge here is that there's a huge uncertainty.

I mean, the big uncertainty is we don't know how long the events in the

Middle East are going to continue. How long the straighter form is is going to remain closed and how much that's

going to continue to put upward pressure on oil prices in particular.

The longer it goes on, the more likely it is to drive oil prices higher. The more likely it is,

it creates even more weakness in growth. And we see growth slow down even further.

Our working assumption is that if it opens sometime soon in the next little while,

oil price comes down a bit and we don't end up with an outright contraction in New Zealand.

And we end up with a short sort of short-lived contraction in Australia.

Australia is in a little bit of a different spot right now because they've already got inflation

that's too high and we've already had the RBA lifting interest rates twice.

So that's our working assumption. But I think the longer this goes on and we're talking about,

you know, if it goes on for weeks into months, then the more likely it is to push the economy into an outright,

an outright contraction. And we're out, you know, that's going to be the challenges.

It's not an easy time for policymakers either because what are they focused on?

Do they focus on the inflation that's going up or do they focus on the growth that's slowing down?

And I think for the RBNZ, for the moment, I think they've got room to sit still next week.

I think they're going to sit still and sort of watch and wait as the world and observe what's going on and work out where they land by the next,

by the following meeting for RBA, they haven't had that wriggle room.

So they had to lift rates last month, anyway, earlier this month, anyway.

How often are you revising what you guys think is happening?

Well, we try not to revise too frequently because it does become difficult.

But I think what we've done this time around, which I think is quite useful, is set out a base case

where we think things are based on reasonable assumptions that we put together about last week, basically.

And then set out a scenario and the scenario sets out what would happen if things turn out to be, you know,

oil prices stay higher or go higher and stay higher for longer.

And in that scenario, obviously conditions are worse.

The economy tips into a larger contraction and inflation stays higher for longer.

And so I think the most, the way we can think about that is it's useful because it gives us a sense of, well, this is what we think will happen.

But there are other things.

But if the circumstances are different, we can think about it through that lens of a scenario.

I mean, you guys working, it seems to me from this side of the ditch that New Zealand is in a better position than Australia.

Not only because we are slightly better in terms of our inflation, but also because our oil supply seems to be a little bit more assured than Australia.

Would you say that's the case?

I think so. I think New Zealand is.

And I think I was actually in New Zealand last week talking to clients.

I was telling them this. And I think, you know, it's hard for Kiwis to think, oh, really we're in a better spot than Australia.

But I think the reality is the Nate because inflation is already down more.

And because you've had a number of years now of quite weak growth in New Zealand, you're in a slightly better starting point for the nature of the

shock that's just arriving. So it's another pickup and inflation.

And so inflation being lower to start with means there's a bit more spare capacity in the economy.

A little bit more room for the RBNZ to sit still and sort of observe. Whereas in Australia, I mean, inflation's already too high.

It's 3.7% already. And we're just about to get another step up in inflation.

So I think this has meant the RBA has just not been as well placed to given the nature of the shop that's arrived.

Paul, this is good to talk to you as always. We'll talk to you again soon. Look after yourself. Let's Paul block some HSBC's chief economist.