Liam Dann: Where Kiwis will pay the price for Putin’s war

OPINION:

As if a pandemic wasn’t enough for the global economy to cope with, we now have a European war.

Russian President Vladimir Putin’s attack on Ukraine is despicable – he’s killing innocent people.

It’s also a deeply concerning attack on democracy at a time when that liberal democratic government is under pressure around the world.

From a moral and historic perspective, perhaps that puts the economic implications down the list of concerns.

But nevertheless, those issues will be significant and they are not good for any of us.

They arrive at a time when the global economy is precariously balanced.

We will feel the impact of this war at the petrol pump, in the supermarket aisles, when we check our KiwiSaver balances and, potentially, in higher interest rates as central banks have to work harder to head off inflation.

As with the impact of the pandemic, there are many conflicting forces that will push and pull at the direction of the New Zealand economy.

At the most basic level, we face a price shock for global energy prices.

Russia accounts for around one-third of Europe’s energy needs through its oil and gas trade.

Oil spiked above US$100 a barrel on news of the invasion on Thursday. It had settled back to around US$99 on Friday but the volatility is far from over.

Many analysts expect it to rise much higher in the coming days.

A lot depends on the final extent of sanctions and how the rest of the world’s oil producers react.

Big nations, like the US, have large strategic reserves they can unleash on the market in times of crisis.

We may also see the US accelerate the shale oil production that kept prices low through the past decade.

Regardless, the price of oil has already soared by more than 50 per cent in just six months.

That oil price flows through to every part of the modern consumer economy and is a primary driver of inflation.

While this is not yet an oil shock on the scale seen in the 1970s – prices jumped 300 per cent in 1973 – the global economy is now much more complex.

Sanctions on Russia and disruption to Ukraine’s production will affect more than just oil.

Expect to see more upwards pressure on your grocery bill.

Russia is the world’s largest wheat exporter – accounting for nearly 20 per cent of the world supply.

Ukraine is also a big wheat exporter, accounting for about 7 per cent of global exports.

Russia is also the world’s largest exporter of fertiliser (by value).

Again, much depends on the extent and enforcement of sanctions.

The US and Nato appear to have the bit between their teeth, China is unlikely to join in.

But already there are forecasts of fertiliser shortages and food production costs.

Of course, soaring food commodity prices isn’t all bad news for New Zealand.

Our lopsided reliance on commodity exports will again provide a good hedge against the economic stress we face.

Record prices for dairy, meat and wood will keep foreign exchange flowing in.

That won’t save us as consumers, though. Electronics prices are likely to keep rising.

Russia and Ukraine play a key role in producing the neon gas and palladium needed to produce semi-conductors for computer chips.

There are already big supply issues in that sector, which is forcing up prices not just for computers but also cars and fridges and TVs and everything else that gets marketed as “smart” these days.

All of that pricing pressure makes things more difficult for central banks as they seek to get on top of inflation by lifting interest rates.

That makes sharemarket investors nervous.

We saw a sharp sell-off on news of the invasion. The NZX copped the worst of it – shedding more than 3 per cent on Thursday.

Wall Street coped better.

History suggests that markets can handle geopolitical unrest pretty well.

But markets, both here and in the US, have already dipped into correction territory over inflation fears and rate-hike expectations.

We should expect more volatility and potentially more sell-offs as the reality of “higher inflation for longer” sinks in.

The war in Russia highlights New Zealand’s vulnerability to global economic forces.

That hardly needs highlighting given the havoc the pandemic has delivered in the past two years.

Inevitably, though, we still have opposition politicians pointing the finger of blame at the Government’s policy choices like raising the minimum wage.

It’s the opposition’s job to do that, to be fair.

Where they argue that the Government and Reserve Bank have exacerbated inflation with an overly cautious pandemic response, they may have a point.

It’s a not point I’d agree.

I agree with Westpac chief economist Michael Gordon, who this week wrote: “Their aim was to err on the side of doing too much rather than too little, and they deserve credit for achieving that – stubborn inflation is a better problem to have than stubborn unemployment.”

New Zealand’s current economic position is not unique. As Gordon says, it only differs with our international peers “by a matter of degree”.

There’s no scenario where we could have avoided this inflation shock.

It is silly to suggest that New Zealand has any control over global pricing.

And it is disingenuous to suggest that rising domestic inflation is not also being influenced by global forces.

Economists draw up tidy piles of tradeable and non-tradeable inflation.

In the real world, oil prices, shipping costs and product delays flow through all aspects of the domestic economy.

Right now they are doing just that, at pace, everywhere.

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