Food and fuel price shocks predicted

Sharply higher prices for oil and basic foods may see prices rising at the supermarket by early next year, says the New Zealand Institute of Economic Research in its latest quarterly predictions.

The independent economic agency sees the economy growing on 1.7 per cent this year, on-trend with the Treasury's May budget forecast of 1.6 per cent, and says while New Zealand is showing signs of economic recovery, world events threaten that outlook.

"The biggest risk to the outlook is from a slowing economy," says NZIER's principal economist, Shamubeel Eaqub.

"The European sovereign debt crisis is spilling over to our key trading partners in Asia and Australia, which will dent our exports."

However, even if food and oil prices cause price shocks, NZIER is forecasting relatively robust growth of 2.7 per cent in 2013, based on a "gradual and patchy recovery because of uncertainties around the timing and size of the Canterbury rebuild and highly uncertain trading conditions".

The impact of the US drought on global grain prices would flow through to dairy prices, which would be good for Fonterra, which on Tuesday cut its forecast payout for this year by 30 cents a litre, owing in part to the strength of the New Zealand dollar, despite some evidence of stronger global dairy prices.

NZIER also expects interest rates to remain on hold through all of next year.

"The economy is slow, there is little inflation and global risks are high," said Mr Eaqub.

"The Reserve Bank of New Zealand will look through the current spike in global food and fuel prices, as they are transitory."

NZN