As well as the human suffering caused by Russia’s attack on Ukraine, the war is causing global economic impacts, some of which are already being felt in New Zealand.

Russia and Ukraine are minor trading partners for New Zealand, with Russia accounting for just 0.4 per cent of New Zealand’s good exports, and Ukraine an even smaller amount.

But Russia’s invasion two weeks ago sent some commodity prices surging, and raised fears of food shortages and further supply chain disruption, which matters for a small trading nation like New Zealand.

On the one hand rising commodity prices are good for New Zealand’s primary producers, but on the other, it means New Zealanders pay more at the petrol pump and face increased inflation.

ANZ economists Finn Robinson and Sharon Zollner said New Zealand’s biggest exposure to the war in Ukraine was largely through price channels.

Commodity prices have been rising steadily over the past year, as rising global demand struggled against Covid-19 disruption, they said.

“But with the outbreak of war and implementation of sanctions against Russia, those increases have turned vertical,” they said.

As a small open economy, New Zealand was exposed to global fluctuations in commodity prices, they said.

ANZ economists Finn Robinson and Sharon Zollner said New Zealand’s biggest exposure to the war in Ukraine was largely through price channels.

The most obvious impact for many New Zealanders was through petrol prices, they said.

Oil prices hit fresh 14-year highs after the United States and United Kingdom announced bans on imports of Russian oil.

Robinson and Zollner said petrol prices had a weighting of less than 5 per cent in the consumer price index (the changing price of the goods and services), but were still likely to add significantly to inflation over the first half of the year, given the sheer size of the movement in oil prices taking place.

Previous research by the Reserve Bank showed that a sudden spike in commodity prices, excluding oil, was more like a positive demand shock for New Zealand, supporting domestic consumption and investment, sending inflation higher over about a year, and generating a positive interest rate response to the higher inflation, they said.

Inflation expectations were already worryingly high, and domestic inflation had shown no signs of slowing, they said.

READ MORE

• Kiwis tell PM Jacinda Ardern why the cost of living is a 'crisis' in viral Reddit thread
• Petrol thefts on the rise as motorists struggle with pain at the pump
• Increased cost of living inching towards 'crisis' as Kiwis pay hundreds more for basic items this year
• The sky-high cost of living in New Zealand: Why is our food so expensive when we produce enough to feed 40 million?

The bank was forecasting inflation would peak at 7.4 per cent in the second quarter of the year.

They expected the Reserve Bank to respond to “a wall of inflation” by increasing the cash rate 50 basis points in both April and May. That would double the OCR from 1 per cent to 2 per cent.

Higher commodity prices also usually caused an appreciation in the New Zealand dollar, providing some inflation offset by making imported goods cheaper, they said.

“We don’t know how much further commodities will rise, or when (and how far) they might then fall.”

Even excluding the impact of oil, commodity prices could still have a “significant and persistent” impact on inflation in New Zealand, they said.

ANZ economist Susan Kilsby said New Zealand commodity food exports were likely to increase in price as global supply tightened.

The invasion of Ukraine was also pushing up fertiliser costs, but New Zealand had a natural hedge to higher commodity prices by being a large food producer, she said.

Ukraine and Russia were both large producers and exporters of corn and wheat, with Ukraine often referred to as the “breadbasket of Europe”, she said.

“If the situation is not resolved before the next harvest, then supply shortages could occur, with implications for both food and animal feed markets.”

Financial markets were already pricing in the risk of grains being in short supply, and the increased cost of feeding grain to livestock would restrict the global supply of beef, pork and milk and increase prices, she said.

New Zealand farmers were not directly impacted due to stock being primarily pasture-fed, but they would benefit from higher prices, she said.

Kilsby and ANZ strategist David Croy said steeply rising commodity prices posed a significant risk to inflation and a time when the global environment had already been highly inflationary.

Rising commodity prices were “a pillar of support” for the Kiwi dollar, and New Zealand exports would provide a sound offset to higher oil prices, they said.

While higher import and export prices may offset each other from a net national income point of view, they were both inflationary, they said.

The world was facing another “hefty round” of global supply-chain disruptions, they said.

“All up, it’s another big, ugly supply shock on top of lingering Covid impacts, with serious inflationary consequences that give central banks absolutely no room to ‘give growth a chance.”

Before Russia’s invasion of Ukraine petrol prices in New Zealand were more than $3 a litre in some parts of the country. Now, there are predictions it will soon hit $3.50.

Kiwibank chief economist Jarrod Kerr said the benchmark international price of oil pushed through US$120 (NZ$176) a barrel for the first time since 2008.

Russia was a large player in oil and gas, and tough sanctions risked disrupting supply chains further and adding to inflation, he said.

“Oil prices are up over 60 per cent this year. That affects everyone,” Kerr said.

Rising oil prices acted like a tax on New Zealand spenders both at the pump and on everyday living costs, he said.

He said rising commodity price were a double-edged sword for New Zealand, but overall a net negative impact on the New Zealand economy would be felt.

New Zealand’s primary producers, particularly dairy, meat and log producers, would benefit via rising incomes, but businesses were also facing rising operating costs, he said.

Ukraine was a major food producer and concerns around global food supplies were causing food prices to rise internationally, he said.

This would result in “imported inflation” being felt by New Zealand households, he said.

Inflation was sitting at about 6 per cent and was likely to increase to above 7 per cent, he said.

“Clearly we haven’t seen the peak of inflation in New Zealand.”

A measure that captures the net impact of import and export prices is the terms of trade, which gives an idea of New Zealand’s purchasing power with the rest of the world.

The terms of trade for the December quarter fell slightly from a record high in the previous quarter.

Kerr said a rebound was likely in the March quarter, as recent surges in export prices such as dairy were captured however, the crisis unfolding in Europe threatened terms of trade beyond the first quarter of 2022, which would be a negative for New Zealand’s economic growth.

He said the Reserve Bank must act to keep inflation expectations anchored and avoid stoking price rises as imported inflation filtered through the economy.

The Reserve Bank was already in the process of lifting the cash rate and Kiwibank expected the rate to be steadily increased to 3 per cent by next year from 1 per cent currently, he said.

“It’s going to hurt discretionary spending.”