Spectre of oil prices knocks confidence

Oil prices are the main international factor bearing on business confidence. But concerns about the level of the United States dollar, US growth, China's competitiveness and global inflation rank close behind.

The Reserve Bank's June forecasts contain the optimistic assumption that world oil prices will fall back to around US$45 a barrel.

But ANZ National Bank economists reckon that if oil prices stabilise around US$70 a barrel, a further drop in the exchange rate to the US50c to 55c range would send petrol climbing to $1.90 or $2 a litre at the pump.

As well as adding about 0.9 percentage points to inflation over the year ahead, the impact on business and consumer spending power would make the economic slowdown worse.

Higher oil prices would also tend to push up world interest rates as central banks lean against inflation pressures that are on the rise.

Annual inflation has hit 4 per cent on both sides of the Tasman. Across the OECD as a whole it was 3.1 per cent in the year to May 2006, up from 2.7 per cent a month earlier.

World interest rates, in turn, are a major influence on the cost of funds for the fixed rate mortgage which now represent the overwhelming majority of home loans by value.

The rise of China as the workshop of the world is seen as a double edged sword: reducing the cost of consumer goods and the purchasing power of a basket of New Zealand's commodity exports, but also as a threat to what remains of the manufacturing sector.

The state of World Trade Organisation negotiations - rated by the the Indian Trade Minster as somewhere between intensive care and the crematorium - is more of a concern than such risks as further instability in the Pacific, a bird flu pandemic or the threat of more terrorism in the region.