The economic fallout of the Middle East conflict for New Zealand is spreading well beyond the fuel pump, ASB says in a report.

As the war enters its 12th week, ASB’s analysis suggested supply chain costs would rise and that there would be further pressure on household spending.

“While the immediate effect has been higher fuel prices, that’s only one piece of the puzzle,” ASB senior economist Kim Mundy said.

“The broader story is how the entire cost shock (which includes fertiliser and petrochemicals) spreads through supply chains, lifting the cost of manufactured goods, packaging, freight and farm inputs, and the flow-on effects of that to consumer spending,” Mundy said.

“Those pressures are already showing up in real costs for some businesses with freight operators providing the clearest early examples.”

Earlier this month, shipping giant Maersk applied a 27% fuel surcharge while the Interislander almost doubled its fuel surcharge for commercial vehicles crossing Cook Strait – increases likely to be felt across a broad range of businesses.

ASB expected the initial inflationary pressure to be felt most acutely in food, freight, plastic products and other goods with high transport or packaging costs.

At the same time, discretionary sectors such as retail, hospitality, arts and recreation may face softer demand as higher fuel costs reduce household spending power.

The bank said the effects of the Strait of Hormuz’s virtual closure would reach further into the economy than may have first been apparent, with few sectors likely to escape entirely.

Mundy said agriculture, manufacturing, construction and transport appeared most exposed, but even less fuel-intensive businesses could be hit as households shift spending towards essentials.

ASB senior economist Kim Mundy.

“That creates another headwind for economic growth,” she said.

While the Government had indicated the risk of a fuel shortage and rationing remains low, ASB urged businesses to review where they are exposed and prepare for ongoing volatility.

“Roughly a quarter of our economy has a high, or very high, exposure to at least two of the key disruptions we analysed in our research so for businesses, the message is to look beyond direct fuel use and assess their exposure across suppliers, freight, packaging inputs and customer demand while the conflict in the Middle East persists,” Mundy said.

ASB said the fertiliser trade had also been heavily disrupted by the closure of the Strait of Hormuz.

About a third of global fertiliser trade normally passes through the Strait, and the closure has caused fertiliser costs to similarly skyrocket.

At the same time, the production of fertiliser is heavily reliant on natural gas, with the Strait of Hormuz also a key trade channel for natural gas.

“Unsurprisingly, agriculture has the greatest direct exposure to fertiliser – particularly horticulture and farming sub-sectors – but manufacturing is also exposed,“ Mundy said.

Since the conflict began, retail diesel prices in New Zealand have risen about 45%.

ASB modelled how a sharp increase in fuel costs tends to reduce retail sales volumes, excluding fuel spending.

Its findings supported the idea that industries more exposed to discretionary spending were more at risk of a demand slowdown during a fuel price shock.

Cost pressures in primary and goods-producing sectors were likely to lead to lower production and some margin compression in the near term, leading to weaker GDP.

In the unlikely event of a prolonged shortage, the economic costs would be significantly higher.

However, the bank said fuel shortage was “a low-risk outcome” at this stage.

ASB said it would be watching incoming data closely to understand how the inflation impulse was filtering through the economy and the extent to which GDP growth was faltering.

Jamie Gray is an Auckland-based journalist, covering the financial markets, the primary sector and energy. He joined the Herald in 2011.