Brian Fallow: Nation in for bumpy ride for next three years

Fasten your seat belts. Have the airsickness bags ready.

Economic headwinds and political crosswinds will combine to give the country a turbulent ride over the next three years.

A lot of political horse trading remains to be done, but based on Saturday night's numbers, a couple of preliminary conclusions can be drawn.

One is that there is no electoral mandate for any major turn to the right.

Even if you classify New Zealand First and United Future as right-leaning, conservative parties, National would need both of them as well as the Maori Party and Act to command a majority.

The second conclusion is that paradoxically the recovery in National's fortunes has both decimated the minor parties and amplified their influence.

New Zealand First, the Greens, United, Act and the Progressives have 22 fewer seats than in 2002. But because the two big parties are so evenly matched, whoever leads the Government has fewer options when it comes to mustering a majority, either for confidence and supply or for ordinary legislation.

If it is Helen Clark, which seems the more likely scenario, she would need not only Jim Anderton and the Greens but either New Zealand First or both the Maori Party and United.

If on some matter she could not count on the Greens, she would need New Zealand First, the Maori Party and United Future. It would be like harnessing a horse, a mule, an ox and a husky.

Add the normal risk of MPs spitting the dummy, jumping waka or disgracing themselves and it hardly looks like a recipe for "strong and stable" government.

Meanwhile the economic environment will be much more challenging over the next three years than over the past six.

A cyclical slowdown is already well under way even if the spending side of the economy has yet to feel it.

Growth has been running at a below-par average rate of 0.5 per cent a quarter since the middle of last year, but the inflationary hangover of the boom is keeping interest rates and the dollar high.

Add to that an oil shock the magnitude and duration of which is anyone's guess, and the only question is whether we are in for a soft landing or will hit the ground with the kind of thud that buckles the landing gear.

Higher petrol prices are hitting at a time when other costs are already putting pressure on firms' profit margins and when the labour market is the tightest in a generation. This increases the chances that people will pass on the cost of petrol to their customers or their employers, engendering the kind of generalised and persistent inflation the Reserve Bank has to combat with the only weapon it has, higher interest rates.

But looking beyond that, the high international oil price is sapping the purchasing power not only of consumers in New Zealand but in our export markets, deepening the economic trough that lies ahead.

This suggests that instead of an economy that stayed stronger for longer and kept torrents of tax revenue pouring in, the outlook is for negative surprises on the fiscal front.

And that will make it harder to find the money to scratch smaller parties' policy itches.