FYI | May 26 2006
By Chris Shaw (Tokyo)
Australia is a net energy exporter, which means when prices are high individuals suffer but the economy itself is a beneficiary. In contrast, New Zealand is a net importer of energy, which leads Commonwealth Bank to suggest the likelihood high oil prices will continue for the next couple of years is a negative for the Kiwi economy overall.
In the bank’s view there are three stages of impact from high energy prices, the first of which has already flowed though via higher fuel prices and transport costs, as anyone buying an air ticket lately can attest thanks to the surcharges the airlines are tacking on. These price increases in turn put pressure on inflation, as fuel prices are a component in calculating the consumer price index (CPI).
When signs emerge the pressures are flowing through to the second stage this opens the door to other problems according to the bank. It includes in this second stage of effects the potential for the higher transportation costs to feed into calls for higher wages for workers and higher selling prices for businesses as they attempt to offset their higher cost bases.
This creates headaches for the government as it attempts to set appropriate monetary and fiscal policies, particularly in New Zealand where interest rates are already high thanks to the central bank’s attempts to slow the housing sector. With inflationary concerns increasing, the outlook is for the Reserve Bank of New Zealand (RBNZ) to offer no relief in terms of lower interest rates this year.
While such an approach makes sense in terms of fighting inflation it does increase the chance of the third stage impact emerging, which is a slowdown in the overall economy. This would reflect a weakening in economic activity as households cut their spending and businesses invest less, while also potentially pushing the unemployment rate higher as jobs are lost thanks to falling profit margins.
As the Commonwealth Bank notes, the cost impact of higher fuel prices is likely to be significant, as an average family’s car costs are likely to reach NZ$104/week next year, almost double the amount in 2001. This will leads to changes in spending habits, so the weekly night out at the movies may become a night on the couch with a DVD.
This is also likely to see inflation move above the RBNZ’s target band of 1-3% for at least some time, which again means any cut in official interest rates is unlikely as long as fuel prices stay high.
If this proves to be the case, the outlook for the New Zealand economy in the Commonwealth’s view is for an extended period of weakness in 2007.
Still, there is always the rugby World Cup to get excited about.