Economist unpacks fiscal threats and opportunities for sector.
Oil and dairy prices are closely linked, says economist Cameron Bagrie.
“You don’t see oil prices drop by 10 bucks a barrel in the space of a couple of days for no reason. Watch this space,” he told a breakfast event during the South Island Dairy Event (SIDE) in Timaru.
He spoke about the tariff situation in the United States, noting that the US dollar is considered the world’s reserve currency mainly because the country runs a significant trade and current account deficit – currently around $1.1 trillion.
“That’s a huge amount of money that needs to flow into the US each year,” Bagrie said.
US President Donald Trump’s push to reduce trade deficits could weaken the US dollar’s status as the world’s reserve currency, Bagrie said, as smaller deficits mean less global demand for US dollars.
“If you’re a central bank, the last thing you want right now is a cost shock rippling through the economy.
“If inflation is at your 2% target, you might be able to absorb a one-off hit and hope it stays contained. But if you’re still a way from that target – which is where the US Federal Reserve is – you could very well have an inflation problem on your hands.”
Building on his comments about inflation, Bagrie said the strength of the US dollar is keeping the New Zealand dollar under pressure, with it currently sitting around 55 to 58 cents and possibly heading lower.
“A sub-65 cent dollar is actually pretty good for the New Zealand economy,” he said, as it helps reduce the current account deficit, gives exports a boost and supports commodity prices.
Bagrie said banks need to take more risks and diversify lending to support broader economic development rather than concentrating on low-risk housing loans.
But the biggest concern, said Bagrie, is the division.
“New Zealand is a very divided society at present, and there’s a certain anger across New Zealand that worries the hell out of me.”
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