Commentators have been predicting an economic recovery for New Zealand for some time. Photo / Getty
This week Liam Dann and Sam Stubbs have written reasoned pieces on why things are getting better and economic recovery is on its way. Even a fortnight ago I would have readily agreed, and was considering a similar column. But now, given what is happening offshore, they’re wrong.
Indeed, just a little while ago I would have argued that after an overly long period of stagnation New Zealand was well overdue a cyclical recovery barring an absolute “black swan” – an entirely unanticipated large event. Our recovery has seemed like an unborn baby in its mother’s womb, bursting over term, more than ready to enter the world with a flourish.
After all, it should have happened in 2025, but US President Donald Trump trumped it with sentiment-sapping worldwide tariffs. Then, as if to show again who’s in charge of wrecking things, he did it again this year with the Iran war, which threatened economic and financial carnage, but which markets somewhat surprisingly took in their stride. Government and supply chains here did a commendably good job through the initial months of an on-again, off-again war.
But right about now, despite export-led growth in agriculture, a tourism recovery, and some tech services going superbly, we need to be real about where things sit. For the first time in some time, we need to soberly face the truth about how unclear and negative things are looking offshore and what this means for our small, exposed, still first-world economy.
Here, then, are the facts, in no particular order. War in Ukraine and Iran aren’t ending soon and, despite some people’s naive belief that they don’t matter from so far away, they really do, for the same fundamental reason: oil.
When it comes to Ukraine, what a bloody tragic loss of life it continues to be. It’s a credit to the Ukrainians that it has gone so long, and at times this year reportage painted a picture of the smaller nation holding the upper hand. Unfortunately, this no longer seems so true. The Russians, we are told, are more confident and their EU counterparts have little to no winning strategy. Ukrainian drones have changed modern warfare, but it’s been reported this week the Russians now have a new tranche of jet-powered weapons with parts sourced from China, showing ongoing resilience, resources and might.
When it comes to Iran, one of a number of troubling recent turns has been the Iranian-backed Houthis’ attacks on the Kingdom of Saudi Arabia, taking a port city and an island in the Yemen and Red Sea, putting them in a far stronger position to threaten and disrupt ships and supply chains. Saudi Arabia was even forced to shut its vital East-West oil pipeline this week.
Taken together, the never-ending Ukraine and Iran wars are a disaster for the global economy and are increasingly pushing petroleum markets – petrol, jet fuel and diesel – sky high, so global markets are no longer pricing a return to normal but elevated prices ahead. This week Brent crude, the international oil benchmark, rose above US$108 a barrel and global oil executives are now saying the fuel shock they’ve warned of all year has finally arrived. The reserve buffers Government and the private sector had in place are now nearly gone, but the prolonged heavy disruption of the Strait of Hormuz most certainly isn’t. It’s a grim picture.
This in turn spells a word we know a little about here in New Zealand: I.N.F.L.A.T.I.O.N. This will hurt almost everywhere, including here, and when you add this week’s historic turns in global bond markets and a central bank rate hike in the United States for the first time since 2023, both triggered by fresh oil price surges, things look even worse. Note the 10-year US Treasury yield increase to 5% puts it at its highest level since 2007, just before the last Global Financial Crisis. As top US experts have said, this is a worrisome threshold, “this is a moment to pay attention to”.
And this is before we get to Super El Niño, with predicted negative effects on food production, and the not-insignificant matter no conversation can be without: Big Tech, the Tech Bros and AI.
Let’s leave to one side the spat between Anthropic co-founder Dario Amodei and other tech kings who’ve backed his call for a deliberate slowdown in advanced AI development to keep the world safe, and Trump, who dismissed all this as a “hoax” while backing a light regulatory touch for the mega-sector. The sense that a major correction to huge AI stock prices is coming is ever growing. This isn’t necessarily because the sector is overhyped, but because it’s real, and as with other transformative sectors of the past (think rail, think the internet), there is always a downturn after everyone piles into the right trend, invariably shaking the world economy before things at some point pick up, go and grow again.
In the meantime, AI data centres are sucking up resources from water and energy to copper, chips, other electronic materials and people, all very inflationary and contributing to the bond and central bank issues above, alongside the fuel shock everyone agrees we are now finally in for real.
Closer to home, Messrs Dann and Stubbs can point to some positive data, for sure, but outside exports it’s right to remember this week’s electronic card spending release shows spending by Kiwis fell across the board in August. Analysis by ASB’s economists says this will be because of higher fuel prices and interest rates (the vicious circle for consumers we are now in). Why this matters isn’t just the pain it causes. In the end, can you really have an economic recovery while consumers, households and SMEs (probably the same people) don’t feel it? I, for one, certainly doubt it.
You’d be a brave pundit today to predict the Reserve Bank of New Zealand won’t keep lifting the Official Cash Rate given the clear global consensus on the fuel shock and what it will do to inflation everywhere. The vicious circle of higher fuel costs spurring higher interest rates will continue.
But before I am shot for all this treasonous gloom porn, I have to defend myself by saying a correct understanding of the economic realities has got to be better than belief in fairy stories.
First, I don’t think we can say anyone, including the Government, is responsible for what’s happening. There are forces – and weirdnesses – here bigger than all of us. Equally, had we got the cyclical recovery I’d hoped for at the end of this year or start of next, I’m not sure anyone here would have deserved much credit either.
Second, this economic picture calls into stark relief the need for economic competence and experience from our political leaders as we vote in election year. A related point is one I’ve made a number of times in recent columns: strong pro-growth economic policies can make a real difference and set a small nation up to do better than the pack. I’ve referred to Estonia, Ireland and Singapore. But let me add Greece, which also deserves a hat tip.
Just years ago, the words Greece and economics, used together, were the punchline in jokes. Today, far from it. In 2023, for example, it was The Economist’s country of the year. And this year it’s attracting big dollars around its hedge fund arrangements, which look more attractive than regimes in other countries that have traditionally dominated this field.
Finally, if American pollster James Carville is right that it’s the economy stupid, how this reverberates in election year is anyone’s guess. In a week with so much happening from Houthi attacks, oil prices and treasuries hitting historic highs, and the Fed raising rates, another interesting event has been the Swedish election, which after voting day has failed to deliver a clear winner with fewer than 30,000 votes separating the left-wing bloc and the right-wing Government. Prolonged coalition talks are now likely. I hope this isn’t also in our future.
Simon Bridges is the chief executive of the Auckland Business Chamber and was the leader of the National Party from 2018 to 2020. He has also served as the Minister for Transport, Economic Development and Communications. He is the chair of the NZ Transport Agency Waka Kotahi and has worked as a senior Crown prosecutor in the Tauranga District and High Courts.
