New Zealand's economic outlook amid Iran's war, oil shock, and productivity decline
Chelsea Daniels interviews NZ Herald Business Editor-at-Large Liam Dann on the economic pressures facing New Zealand.
Summary
Host Chelsea Daniels speaks with Liam Dann, Business Editor-at-Large at the NZ Herald, about two converging economic pressures on New Zealand: the inflationary impact of the Iran war and associated oil shock, and newly released StatsNZ data showing continued productivity decline. Dann explains that Treasury's best-case scenario — oil at around US$110 a barrel, inflation peaking at 3.9%, and unemployment at 5.3% — is already looking optimistic, with other economists forecasting inflation as high as 4.5%. He warns that if oil price pressures become embedded in core inflation, the Reserve Bank will likely raise interest rates, with ANZ forecasting three hikes by October. On productivity, Dann argues that New Zealand's deeper structural problem is misallocated capital — too much flowing into residential property and not enough into business, technology, and R&D — and that successive governments have understood the problem without managing to fix it.
Key Takeaways:
Key Takeaways
FULL TRANSCRIPT
Iran's war, oil prices, and what Treasury's scenarios mean for New Zealand
Chelsea Daniels: The finance minister is adamant that New Zealand's economic recovery has been delayed, not derailed, by the war in Iran. Nicola Willis has shone a light on the country's economic outlook in the lead-up to next month's budget. At the same time, StatsNZ data on the country's productivity performance for the year to March 2025 shows our productivity continued to fall during what was a recessionary period for New Zealand. Today on The Front Page, NZ Herald Business Editor-at-Large Liam Dann is with us to take us through what this all means for our country's economy and for you.
So Liam, the IMF's advice about how countries should respond to the oil shock has been that countries should preserve price and financial stability, safeguard fiscal sustainability, and implement structural reforms without further delay. What does all that mean?
Liam Dann: In simple language, they're saying make sure you stay on top of inflation. So that's effectively warning central banks to stay ahead of the curve — probably means lift interest rates earlier rather than later. The fiscal situation just means they're warning not to start splashing cash around that you don't have.
Chelsea Daniels: And so I guess that kind of prescription is not that dissimilar from what the current coalition government is talking about, really.
Liam Dann: Yeah. So Treasury has laid out a few scenarios. Granted, they did them last month, so things have obviously changed since then. The best-case scenario would see a short conflict with oil flow through the Gulf gradually resuming and oil prices averaging around US$110 a barrel. For context, this looks the most likely given it's actually US$102 a barrel now. So I don't really see any point going into the worse and worse scenarios.
Chelsea Daniels: I suppose. And I didn't think that you would think that either. It means, actually — on this best-case scenario, inflation would reach 3.9%, growth would fall back to 2%, and the unemployment rate would be at 5.3%. What do you make of those numbers?
Liam Dann: Nobody else seems to think they're going to be right about that. In fact, other economists are generally a bit more pessimistic. Oil prices are in actual fact back over 100 right now, but have probably averaged below 100, given that we've had a couple of weeks in the 90s while people were hopeful about the ceasefire. The problem is how long it goes on for, really.
Treasury is saying 3.9% for inflation. Other economists are saying 4.2%, 4.3%. I think Westpac has warned of a peak of 4.5% in the second quarter. That's the inflation from the immediate supply shock. The problem is if it continues on, it starts to embed itself into the economy. People pass on the price pain, and it works its way through the economy into the core inflation or secondary inflation areas — and those are a problem for the Reserve Bank. They're the ones the Reserve Bank can actually do something about. It can't really do anything about global oil prices, and that's where they've warned that they will move to lift interest rates if they see it starting to get embedded.
And when you look at some of the forecasts from economists — ANZ, for example, is expecting about three rate hikes this year: July, September, and October, 25 basis points each time, to take us to 3%. That is more or less indicating that they think that's going to happen to some extent, or that the Reserve Bank will want to head it off as the IMF has suggested.
Chelsea Daniels: Yeah. And what's the significance of growth falling back to 2%? Because I saw that Finance Minister Nicola Willis was referencing the IMF's scenarios. They came up with a separate list of scenarios, and basically a severe one — which would see greater damage to energy infrastructure in the Middle East — would see global growth reducing to about 2%. And the IMF says that this would mean a close call for a global recession, which it defines as the growth rate being below 2%. That's only happened four times since 1980, a couple of them in recent memory — obviously the pandemic and the global financial crisis. So is it really concerning that the best-case scenario has us floating around that 2% growth figure?
Liam Dann: Well, they're talking about global growth, and that's a bit different because we think of recession as going backwards, below zero. But when you look at global growth, it's got a lot of developing nations that, because they're so poor, tend to see really high levels of GDP growth — 13% and things like that — and that skews the global average. So they're saying that if it did go below 2%, they would call that recessionary for the world.
New Zealand's growth is not likely to be at that level. We'd probably be quite happy with 2%, ironically. It's probably going to go below that. There are economists forecasting, as a base case based on what we're already in, that we'll see a contraction in the current quarter and then a return to low levels of growth — around 1.6% annual growth rate — once we get through the worst of the crisis. But it is all touch wood around scenarios at the moment, and hope for the best, because we still don't have a resolution. We still don't have the Strait of Hormuz open.
I heard the finance minister say "delayed, not derailed" around the recovery. I think that's true. There will be a lot of pent-up demand. The New Zealand economy has got money in it, thanks to the export commodity boom. Interest rates are at cyclical lows, so people will be locking in at the most stimulatory mortgage rates. Those things would normally have us growing quite well. People are putting decisions on hold because they're nervous about the uncertainty. And of course, some people don't have the spare cash because of the squeeze on the price of petrol.
But once we have some certainty, there'll be pent-up demand that gets released, and we will see some growth in the economy again. It's just a question of how long it's delayed — not derailed. We hope. It's a tough message for the government because I don't see it really picking up substantially before the election, which makes their whole economy story very difficult to sell.
Budget 2026 and the challenge of forecasting in uncertain times
Chelsea Daniels: Yeah, well, the elephant in the room is going to be in the room in a few weeks' time, and that's Budget 2026. Willis mentioned that she hasn't actually gotten the latest Treasury forecasts that will provide the basis for the budget, because Treasury has reopened the forecasts for this year's budget for obvious reasons. So Cabinet will take their fiscal decisions in the next few weeks. But how close to the line can they get with that fiscal outlook in regards to the budget? Because it'll be announced presumably still on May 28, regardless.
Liam Dann: Yeah, absolutely. They're working year-round on the budget overall — on the overall thing based on policies — and they'll have a broad framework for the budget already. They've then got to plug in some final numbers, which do flow through. Your growth projections flow through to your tax take projections, and that's your revenue for the government — how much money it's got to spend. So they are important. They want to leave them as late as possible in a really uncertain climate like this, but there'll be limits. It takes a few weeks to plug them in and do the final equations, and then there are just the logistics — printing the thing off and all that sort of stuff.
It makes it very difficult, though, because bank economists can upgrade or downgrade their forecasts any time they want, effectively based on the latest news we've got, the latest insight into what's happening in the oil situation in the Strait of Hormuz. Treasury can't do that. It basically has the budget, has a half-year fiscal update, and it has these set points where it does its forecasting, and they dictate a lot of policy. So they have to be quite conservative and quite cautious with them.
But they're also more likely than not to be wrong, because it's pretty impossible to put a stick in the ground and say, "This is our forecast at this time and we're sure it's going to hold for one year or even four years." They have to make long-term predictions for budget spending. So it means that the government has to be flexible around it, and you've got to take those forecasts with a grain of salt and put in a wide range of possibilities — scenarios that you could move either way in terms of what your spending is or what your policy actions are going to be.
Nicola Willis: The revision to have us on watch is confirmation, if confirmation was still needed, that the government's response to the fuel crisis and its wider approach to the economy is the right one. I am very conscious that many New Zealanders would like to see us splashing the cash right now. And I would love to ease the pressure that many people are feeling. We simply can't do that responsibly as a country right now, because we cannot just keep spending more and borrowing more, as some have suggested.
New Zealand's productivity problem — and why it matters
Chelsea Daniels: Now, I saw the other day that StatsNZ's productivity data is out. And I know that this is one of your favourite words, productivity. So why am I looking at something dated 1978 to 2025?
Liam Dann: I'm actually not sure about the answer to that, because when you read the StatsNZ release, the most recent series — the most relevant series of data they've collected — goes from 1996. So presumably there is some older data there, but the stuff you can rely on for being the same methodology and same series is 1996 to now, which is interesting because it sort of captures the whole period of New Zealand's economy through the widespread adoption of computing and the internet and all that sort of stuff. So you can look back and see how our productivity has gone.
The word productivity is quite problematic. I had to write a story about it without putting it in the headline. It's quite abstract to a lot of people — it's not as easy to relate to as the cost of living or something like that, which is why politicians end up talking about the cost of living all the time. But ultimately, productivity is what makes the country wealthier. It's really just as simple as how many hours we work to produce a certain amount — that's our labour productivity. And if we're working harder and producing less, we're going backwards. People can get that.
The bigger problem in New Zealand is actually capital productivity, which is how much money we're investing in the economy and how much output we're getting. So if you think of it like a factory that makes beans — how much money they invest in new technology, how many hours the workers put in, how well trained the staff are — improving all those things should boost the number of cans of baked beans that get made. But since COVID, we've had more capital investment in the economy — more money going in in aggregate — and we're producing less. Which is essentially going backwards, and means that the money isn't being deployed in the right places, it's not being used well, whether that's government money, private money, probably a combination. Hard to say.
It's not a good situation for the country to be in. That's why economists and commentators like me — and ironically I think Christopher Luxon is quite good at talking about this stuff, he loves talking about it and he gets the productivity stuff — but of course that's not really landing with a wider audience because it's a very difficult thing to sell. The word itself sort of makes people yawn.
Chelsea Daniels: Well, I got the bean reference. I like the baked bean factory reference because that makes sense. So why are we putting so much in and not getting enough back? Is it the COVID pandemic? Is it oil prices? Is it production costs overseas? Is it exporting costs, importing costs? Raw materials being more expensive? Is it just a combination of all of those things that we hear time and time again?
Liam Dann: Well, those are sort of top-line things. Under the hood, it's a matter of where the capital is going and where it's being deployed. You could make the case that a lot of money was invested by the government in areas that didn't produce any productive economic output, perhaps around COVID. So that's certainly going to be a factor.
The traditional one in New Zealand is the idea that we're obsessed with the housing market, and a lot of capital flows into residential property, which creates paper wealth. I know the property people will argue that there's an industry around it that does contribute to GDP, but it doesn't have an output. Your home is just sitting there being a home. It's not making another home from the money that you put in, which is what happens when you invest in a business — it expands, it becomes twice as big, because the money is invested in expanding the business.
So there is an issue in New Zealand with capital flow into productive areas — technology, startup businesses, the kind of firms that will create jobs and wealth for the country. That's well identified. It's just that we don't seem to be able to get it together to do anything about it.
Chelsea Daniels: And in terms of countries that are actually doing that, can you point to any examples? I'm thinking maybe like Switzerland or Denmark.
Liam Dann: Yeah, all those kinds of ones — Germany, but even the US, South Korea. These are countries that have a much higher level of investment. They have deeper capital markets, so more of their people are saving money and investing it in the capital markets, and that money is flowing through into their companies and helping them grow. It also means that once you've got a bigger pool of capital going into these things — you've ticked off your boxes of basic investments like banks and power companies — there is extra capital available to invest in startup companies and tech companies. That's why these countries have a much higher level of investment in R&D, research and development. It's not all just about how much the government puts in, although we're not a fantastic example on that front either.
It is about having those big global corporates that pull money in. We've had a few success stories — we've got Fonterra pulling money in. But a lot of our success stories tend to head offshore in terms of who they're owned by. You have a Rocket Lab or a Xero, and they have to go offshore for an international listing. Or the big one is our finance industry, where our biggest banks are effectively owned internationally. So there are some structural issues there with our productivity.
It just frustrates me. I'm sure both Christopher Luxon and Chris Hipkins could rattle off all the productivity problems that we have. They understand it. They could rattle off a bunch of solutions. Just put them in a room and make them get some bipartisan agreement on some of these big issues.
Infrastructure is another one that really bugs people. We just keep flip-flopping around our infrastructure investment. As with the last government, a lot of money was invested into projects that then get dropped or altered significantly by the next government. All that money was wasted — that's capital that didn't produce anything in the end. Because with infrastructure, you've got to get the road built, or the rail built, or the bridge built, so that you can start adding value to the businesses and people using it, and the economy becomes more efficient because of it. That adds to productivity. We seem to fall short on that quite badly.
Chelsea Daniels: Thanks for joining us, Liam.
Liam Dann: Cheers.