Upside scenario
An upside scenario would see tariff deals done quickly and significant “but not severe” damage to the global economy.
“If we get a permanent pivot from Trump, that’s ‘good’ news,” Kiwibank said.
“But time is of the essence ... Market uncertainty would end. And we’re left calculating the damage to the global economy, which would be significant but not severe.”
Regardless of where the tariffs fall, there will be a supply impact on the price and a reduction in demand, Kiwibank said.
“Our upside scenario is a terms of trade shock, but not a bad one. Despite the partial rollback of tariffs, China’s economy is still hit harder than the US economy. The EU is also restrained. And the second-round effects shave a chunk off global growth,” they said.
Kiwibank economists said its forecast Official Cash Rate (OCR) of 2.5% would still be required.
“Even the most optimistic outlook demands a Reserve Bank cash rate below 3%.”
Central scenario
“Our central scenario takes more time. We factor in much more time to negotiate. We’re talking months not weeks,” Kiwibank said.
“The prolonged negotiations leave the global economy in a heightened sense of insecurity. And volatility continues in all markets.”
In this instance, global growth would be significantly lower and the terms of trade shock would hit New Zealand indirectly.
“Our central scenario demands a more stimulatory monetary policy setting. A move to 2.5% by the RBNZ occurs much faster, and opens us up to a move to 2%, if required.”
Downside scenario
In a downside scenario, which Kiwibank economists see as the least likely, New Zealand could be pushed backed into recession, raising the need for increased monetary policy support.
Even quantitative easing, or money printing, could be on the table, economists said.
On the assumption that reciprocal tariffs come back on close to the initial announcement and a prolonged and ugly showdown between US, China and the EU ensues, “central banks [would be forced] to intervene with financial market dysfunction”.
“Money printing to buy bonds, and possibly other assets, is required to appease frightened investors. And the longer it takes, the worse it gets.”
Kiwibank economists said there are thousands of ways in which downside scenarios could play out.
“All downside risks end up with materially lower US, Chinese and European growth. Global growth is slashed. The terms of trade shock faced by New Zealand is enough to push the economy back into recession.
“The RBNZ [Reserve Bank] may be forced to join other central banks in providing a buyer of last resort, especially for Government bonds. It’s possibly a need for QE again We could easily see the cash rate headed towards 1.5% or lower.”
Kiwibank’s economists argued the downside risks are heavy and hard to ignore.
“In short, we think our central scenario, with a hint of upside, is the most likely outcome.”
Cameron Smith is an Auckland-based journalist with the Herald business team. He joined the Herald in 2015 and has covered business and sports. He reports on topics such as retail, small business, the workplace and macroeconomics.
