Strong Kiwi bigger threat to NZ economy than short war

By NZPA

Thursday 6th March 2003

Poor growing conditions and a higher currency are likely to hurt New Zealand's economy more than a short war on Iraq would, economists said today.

The Reserve Bank, which today left interest rates unchanged at 5.75 percent, can ignore the short-term effects of one-off events such as war-related oil price rises when meeting its 1-3 percent inflation target.

Economist Chris Green, writing for Money Managers, said global financial markets had priced in the possibility of a short United States-led war on Iraq, but the relatively benign scenario would only hold true if hostilities lasted a month or less.

Last month's 2 percent fall in the Dow Jones Index, 1.7 percent drop in the Standard & Poor's 500 index, and 4.7 percent fall in New Zealand's top-40 index, were consistent with investor risk aversion, he said.

"While the general tone of global economic data released over the month have generally been supportive of a gradual global recovery, equity markets increasingly appear to be in need of a `circuit-breaker' to help turn sentiment around.

"One of the key factors increasing investor concerns has been the recent sharp increase in oil prices," Mr Green said.

In New Zealand, prices for 91 and 96 Octane petrol increased last month to an average of 113.9c and 120.c per litre respectively, from 107.5c and 112.5c in January.

However, a rise in the New Zealand dollar has helped offset the rise at the petrol pump.

Petrol prices feed through into inflation, but the Reserve Bank has assessed that oil prices have already come close to their peak.

The bank is expecting oil prices to rise to $US33 a barrel in the first half of this year -- not far from their current rate -- before falling to $US24 a barrel in the second half of the year unless there is a prolonged war.

Mr Green said the loss of yachting's America's Cup was "one potential dark cloud", with the country losing economic stimulus through hosting the event of about $640 million, or 0.6 percent of gross domestic product.

"While the loss of the America's Cup will undoubtedly have some negative impact, by itself it is not anticipated to be a key factor in a projected slowing in New Zealand activity during 2003," Mr Green said.

"In particular, the factors expected to be of more significance are likely to be the lower export receipts on the back of weaker commodity prices, less favourable growing conditions, together with the negative impact on exports of a stronger New Zealand dollar."

Mr Green, a former Reserve Bank economist, echoed sentiments from the central bank today that it did not expect a possible war on Iraq to greatly affect the economy.

Wars in recent years had not seriously affected New Zealand's economy, Reserve Bank Governor Alan Bollard said.

"This has been a very forecast war and that has given oil markets a chance to take their view of forward risks into account in terms of setting prices," Dr Bollard said.

Westpac said in its Agribiz newsletter this week that the financial impact on New Zealanders of a short war on Iraq should be short-lived.

Exports to the Middle East account for 2.5 percent of total exports and consist largely of dairy and meat products.

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