The best Prime Minister Christopher Luxon can do now is hope.
Though the US and Iran agreed to a ceasefire yesterday, there is no certainty that the ceasefire will lead to peace in the US/Israel-Iran war.
Luxon must hope that somehow the US and Iran will use the two-week ceasefire to agree to either peace or a longer ceasefire.
But as long as that uncertainty remains, Luxon’s hopes of an economic recovery this year will be shattered.
The impact of the war, not just on New Zealand but on the whole region, was emphasised by Foreign Minister Winston Peters in a meeting in Washington yesterday with US Secretary of State Marco Rubio.
The readout from the meeting said: “Minister Peters outlined the significant negative economic impacts on New Zealand, and our Pacific neighbours, arising from the war, and New Zealand’s desire to see dialogue and de-escalation. Given the impacts on the Indo-Pacific of Iran’s closure of the Strait of Hormuz, Minister Peters and Secretary Rubio stressed the crucial importance countries around the world attach to international law as it applies to freedom of navigation.”
That was formal diplomatic language, but foreign leaders have been left gob-smacked by the language used by US President Donald Trump, calling on Iran “for fucksake” to open the Strait and then threatening to bomb it so heavily that “a whole civilisation will die tonight.”
Luxon called the comments “incredibly unhelpful. I thought they’re unprecedented for a US president.”
But what really must worry Luxon is the realisation that his whole political project, “getting New Zealand back on track,” is likely to become a victim of President Trump’s bombs.
Only a full ceasefire might save him.
“The question is, will the parties actually step up to the plate and realise it and do the hard work of building back trust and working their way through difficult and challenging issues in the interests of global prosperity?” he said.
“And the longer this conflict goes on, the worse it hurts Kiwis here at home.”
That much was more or less confirmed by Reserve Bank Governor Anna Breman yesterday.
“Events in the Middle East have materially altered the outlook and the balance of risk for inflation and economic growth in New Zealand,” she said.
“In the near term, inflation is expected to increase and the economic recovery to weaken.”
There goes National’s re-election plan.
Breman’s thinking is straightforward.
“The supply of oil, gas, and other petrochemicals, such as fertilisers, flowing from the Middle East has been significantly reduced,” she said.
“This is likely to lead to higher inflation and weaker growth, particularly in countries heavily dependent on Middle East oil and gas.
“And this includes many of New Zealand’s trading partners in Asia.”
Breman was at some pains to point out the implications of all this.
“Prior to the conflict, the New Zealand economy was in the early stages of an economic recovery; GDP growth in the December 25 quarter was 0.2%,” she said.
“That was somewhat lower than we expected, but high-frequency indicators over January and February suggested that the recovery was actually gaining strength.”
But looking forward, higher fuel costs and rising uncertainty are expected to weaken the economic recovery in the near term, she said.
“And I would like to acknowledge that this is a challenging time for many New Zealand households and businesses.”
But what the Governor is having a problem forecasting is the extent of any rise in inflation and its consequent knock-on to growth.
“As we’ve seen today, today oil prices fell quicker than the future market price,” she said.
“So if that persists, that (4.2% inflation forecast is on the higher side.
“On the other hand, if oil prices rebound and go up to a higher level again, then it’s on the low side.
“And that’s why we stress that there is a lot of uncertainty with that forecast.”
Finance Minister Nicola Willis was also cautious.
“I just want to make a few comments on what these changes in the oil price mean, because despite the positive development with the ceasefire, it is unclear still how fast cargo will begin to move through the Strait of Hormuz should the ceasefire hold,” she said.
“Oil and gas facilities have also been damaged or shut down across the region, and these will take time to bring back online.
“New Zealand is also a long way from our fuel suppliers, but prices here typically respond quickly to oil market moves, usually within a week or so.
“But this may take longer in this instance, given the heightened volatility in markets and the residual uncertainty about the geopolitical situation.”
All of these arguments point to an ongoing slowdown in the New Zealand economy, not the green shoots the Prime Minister was talking about in his State of the Nation speech back in January.
“I haven’t received Treasury’s final economic forecasts that will inform the Budget yet, so I don’t have final forecasting figures that I can speak to,” Willis said.
“In terms of when inflation will peak, that is utterly dependent on what the trajectory for this ceasefire is and what the geopolitical events are over the coming days and weeks.
“What’s critical here is whether the Strait of Hormuz remains open and how quickly supply chains recover and how long that is sustained, because of course if that were to occur that would have an immediate downward impact on the oil price, on fuel prices internationally, and we could see then lower inflation figures than some of the forecasts have shown.
“On the other hand, if there were to be a greater duration and further price spikes, then you could see higher inflation.
“Genuinely a very challenging question to give a black or white answer to as to whether or not that would be the inflation peak.”
The negotiations between the United States and Iran during the ceasefire hardly got off to a great start yesterday, with a 1600-word statement from Iran’s Supreme National Security Council.
“Iran has achieved a massive victory and forced criminal America to accept its 10-point plan,” the statement said.
“In this plan, America is fundamentally committed to guaranteeing non-aggression, the continuation of Iran’s control over the Strait of Hormuz, the acceptance of enrichment, the lifting of all primary and secondary sanctions, the termination of all resolutions of the Security Council and the Board of Governors, the payment of Iran’s damages, the withdrawal of U.S. combat forces from the region, and the cessation of war on all fronts, including against the heroic Islamic Resistance of Lebanon.”
Almost none of this would be acceptable to the US.
The specific proposal that Iran control the Strait of Hormuz and levy a fee on any ship passing through is unlikely to be agreed to by the US — or many other countries, for that matter.
Singapore’s Foreign Minister Vivial Balakrishnan said his country would not negotiate over access to the Strait as doing so would undermine fundamental principles of international law.
“There is a right of transit passage,” he said. “It is not a privilege to be granted by the bordering state, it’s not a licence to be supplicated for, it is not a toll to be paid.”
He emphasised that the Strait of Hormuz, like the Strait of Malacca and the Strait of Singapore, is a waterway used for international navigation. This right is codified in the United Nations Convention on the Law of the Sea (UNCLOS).
Luxon took a similar stance.
“For us, the freedom of navigation is really important,” he said.
“If you think about what could then subsequently happen with taxes on all sorts of bodies of water that New Zealand uses very critically to move its exports around the world, that’s not something we want to see happen.”
Thus, the pressure on the US not to make concessions to Iran will be substantial.
It is for that reason that the ceasefire cannot at this stage be guaranteed to lead to a peace, and for that reason, the chances of New Zealand “getting back on track” and seeing an economic recovery before the election look very slim indeed.
