Considerable economic pain and a poorer NZ is unavoidable if war continues

Thursday, 19 March 2026

Michael Reddell has held numerous senior roles at the RBNZ and the Treasury, and is currently an economic commentator and a Bank of Papua New Guinea board member.

OPINION: Statistics NZ this morning released its initial estimates for GDP growth in the December 2025 quarter. Of the two measures, one showed growth of 0.2% for the quarter, the other 0.1%.

The December quarter was quite a long time ago, and these first estimates will be subject to considerable revisions. When the statistical dust finally settles, GDP may have fallen a little or might have increased by as much as 0.5%. Perhaps the best we can say is that the economy was probably recovering gradually in the second half of last year, as you’d expect with falling interest rates and reasonably good export commodity prices.

What was going on this quarter before the war began is also hard to tell. If retail spending seemed to be picking up, the Business NZ surveys of purchasing managers suggested that if anything underlying growth may have been losing a bit of momentum.

But, for now, it is water under the bridge. The attacks on Iran, and associated retaliatory strikes, have more or less closed the vital Straits of Hormuz through which a large proportion of the world’s internationally-traded oil (and LNG) normally passes.

Not only have shipments now been very sharply reduced for almost three weeks already, but production has been cut substantially in a number of countries. Crude oil prices have risen substantially and prices of refined products (petrol, diesel, jet fuel) have risen even further. For now, at least those pressures, and associated supply disruptions, have been concentrated in the Asia-Pacific region, from where New Zealand’s refined product imports come.

As of today, the increases in retail prices for petrol and diesel are still not extreme by historical standards. And even the highest posted crude oil prices (for delivery in Oman, now in excess of US$150 per barrel) are still well below (in real terms) the peak seen in 2008. But the supply disruption has been huge (at least as large as any past supply shock) and the risk is that not only do international prices go a lot higher from here, but that the physical availability of refined products to (small and remote) may be threatened. If the Straits situation is not resolved very quickly - and few seem optimistic of that - consumption of oil products globally is going to have to fall, and those cuts are likely to be concentrated particularly in countries without large domestic production and/or reserve stocks (export bans have already been apparent in some countries). Prices could yet go a lot higher; some expert observers talk of scenarios which could see crude prices well over US$200 a barrel.

Anything like that would mean severe dislocation, more so if New Zealand simply could not secure all the product it wanted at international prices. Many business activities rely heavily on diesel, but even for households, what has to be spent on petrol won’t be able to be spent on other things. As things stand today, it wouldn’t be surprising at all to see GDP fall in the June quarter, perhaps quite severely so if there are actual supply disruptions. Even now, you have to wonder (for example) how many people will be reassessing plans for overseas travel (inward or outward), or reluctant to book given the uncertainties about possible flight cancellations, and so forth.

If the international situation isn’t resolved very quickly, considerable economic pain is largely unavoidable. We will be poorer as a country, for a time at least. The only question is how severe the pain ends up being, and how it is distributed. Letting price mechanisms work - and not having competition authorities or politicians hovering over every price adjustment - is a necessary part of an efficient adjustment process. And if there may be a role for some fiscal support for low income workers, that itself is a cost that will have to be paid for now or later. Government debt isn’t overly high by world standards, but it is higher than it was and we go into this nasty shock after two years in which, on the Treasury’s own reckoning, no progress at all has been made in reducing the fiscal deficit.

Inflation will go temporarily quite a lot higher. In the circumstances – real scarcity – that is a necessary part of helping bring about the necessary changes in consumption and demand. It isn’t something the Reserve Bank can, or should, seek to offset. The challenge for the Bank will be in ensuring that as we come through the other side of this nasty shock - and we all hope that is soon, but can’t plan on it being so – people remain confident that they will do what it takes to get inflation finally settling back at around the 2% target midpoint. What specifically that might mean for future interest rates, no one - them included, can know.