Middle East Conflict Escalation Threatens New Zealand’s Economy

Rising Tensions and Economic Risks

The escalating conflict in the Middle East now casts a shadow over New Zealand’s economy, potentially impacting KiwiSaver accounts and pushing petrol prices higher. Analysts suggest the recent US actions intensify existing pressures, raising concerns about broader economic repercussions if the conflict expands further.

Brad Olsen, chief executive of Infometrics, highlighted the US attacks as a pivotal moment. He emphasized the crucial role of Iran’s response, particularly if they mirror their advisors’ suggestions or past actions. Attacks on US shipping or restrictions on the Strait of Hormuz could drastically increase oil prices.

“If they do ratchet up the tension further, if this starts to broaden out into shipping attacks, I think market expectations and worries about oil supply will increase substantially.

—Brad Olsen, Chief Executive, Infometrics

The Government’s concern is evident, as New Zealand deploys a defense force aircraft and foreign affairs personnel. A new report from the World Bank projects a global economic slowdown in 2024, further highlighting the precariousness of the current economic climate. (World Bank, 2024)

Household Impacts and Market Reactions

Shamubeel Eaqub, chief economist at KiwiSaver provider Simplicity, anticipates potential turbulence for households. He noted the market’s unexpected calm so far, despite pre-existing escalations. US involvement has amplified uncertainty.

The Gulf War of the 1990s offers a case study of possible impacts. The two primary channels are oil prices and general financial market instability. However, New Zealand’s reduced dependence on oil offers some insulation, according to Eaqub. He believes the bigger issue is fear, triggering risk aversion.

The New Zealand dollar may become more volatile, often weakening when risk aversion increases. This scenario favors exporters, but it generally disadvantages consumers due to the reliance on imports. The full effects of major geopolitical events often take 12 to 18 months to materialize, yet the initial impacts often stem from fear and market dynamics.

Expert Perspectives and Investor Advice

Rupert Carlyon, founder of Koura KiwiSaver, believes the biggest risk lies in inflation. A wider Middle East conflict, potentially blocking the Strait of Hormuz, could drive up oil prices. This, in turn, would make imports more expensive.

“The Reserve Bank will be watching this very carefully, as anything that has the potential to skew inflation to the upside will mean a halt to further interest rate cuts.”

—Rupert Carlyon, Founder, Koura KiwiSaver

Carlyon does not advise panic, and suggests that markets often overreact to the prospect of conflict.

The advice to New Zealanders is to remain calm and adapt to their circumstances. While oil prices are beyond control, individuals can manage transport costs. In financial markets, a long-term view on KiwiSaver investments is crucial during such times.