Source: Radio New Zealand
Economists are warning about possible stagflation. RNZ / Rebekah Parsons-King
New Zealand could be facing into a period of stagflation, economists are warning.
Stagflation describes a situation in which an economy experiences the unpleasant combination of high inflation, high unemployment and stagnant economic growth.
This could happen as a result of the Iran war because higher fuel prices are expected to create higher inflation, while the impact of those cost increases and the wider confidence blow could slow economic growth.
Mike Jones, chief economist at BNZ, said it was a “stagflationary-type shock” because it had hurt growth prospects and put pressure on people’s disposable incomes and business margins at the same time as it pushed up inflation.
“We’re also vulnerable given the economy going into this was only starting to find its feet,” he said.
“There are some buffers out there – most notably elevated commodity export prices and a falling NZ dollar – but it’s unlikely they will be enough to prevent a decent hit to the economy. I think, at this stage, it’s more a case of the recovery being disrupted or paused for a quarter or two, rather than being curtailed. So weaker growth but still growth.
“But there are still many scenarios in play. Much hangs on how long the conflict goes on for.”
Gareth Kiernan, chief forecaster at Infometrics, said stagflation was discussed as a prospect three or four years ago but did not happen.
“It was inflation followed by ‘we need a recession to rein that back in’.
“I feel like this time is a little bit different because it’s a supply shock that is, one, pushing up prices and, two, going to negatively impact growth.”
He said businesses had told him they had to pass on cost increases.
“I’m not talking about transport businesses putting up their prices. I’m talking about everybody who is using the transport services then being forced to put up their prices, because we’ve had an economy where for the last three years, it’s gone sideways. And people have been trimming and trimming, and there’s nothing left to trim.”
He said while the Reserve Bank expected fewer price increases to be passed on because there was less demand, that was not the full picture.
“Sure, there’s no demand, but you’re going to put your prices up rather than simply just go to the wall because you don’t have any money left.”
He said even if the situation were resolved immediately, there would be another up to four months of flow-on effects.
“Who knows where oil prices would settle… you wouldn’t expect them to probably go back to US$70 a barrel… there’s got to be more risk associated with that. But the longer it stretches on, the bigger the impact is in terms of just delaying or preventing the economic recovery.
“It’s almost a bit of a repeat of 2025 where we had the tariff situation hit us and knock confidence and therefore knock growth. And this is looking like the same again, except probably worse, to be fair.”
But Westpac’s chief economist Kelly Eckhold said he still expected some growth in the economy this year – although there was the potential for that to change.
“In the forecast update that we put out a couple of days ago, that assumed that things were going to get better within a month. If that doesn’t happen then things get darker quite quickly. Confidence levels about forecasts are quite low right now because there’s a lot of things we don’t know.
“You can’t discount the possibility [of less economic growth]. The only thing is that we are coming from a starting point where we were expecting a pretty solid year. So we’ve got further to fall before you get into that genuinely negative growth environment that we experienced back in 2024.”
The big concern was how long the conflict lasted, he said.
“We have to keep in mind that significant damage has already been done and it won’t be fixed quickly. There may also be risk premia built into concerns about fuel availability, prices… I’m very worried. I think this is a very, very serious situation.”
He said the lower exchange rate would make the price of imported goods higher, and make travel overseas more expensive for New Zealanders. But it was a positive for exporters.
“Nobody in New Zealand can protect us from the loss of standard of living that has come from this shock. The government can’t buy our way out of this. They can smooth the edges off for the most vulnerable. But in the end, it’s just a cost that is going to sheet home to us.
“The way out of this is by having the external sector ultimately be able to export our way out of this. And a lower exchange rate is part of the adjustment that facilitates that to occur.”
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– Published by EveningReport.nz and AsiaPacificReport.nz, see: MIL OSI in partnership with Radio New Zealand
