President Donald Trump is imposing tariffs on US trading partners worldwide, his biggest assault yet on a global economic system he has long bemoaned as unfair. Photo /Getty Images
OPINION
Welcome to Inside Economics. Every week, I take a deeper dive into some of the more left-field economic news you may have missed. To sign up for my weekly newsletter, click here. If you have a burning question about the quirks or intricacies of economics, send it to liam.dann@nzherald.co.nz or leave a message in the comments section.
It feels like a lot longer than a week since the last edition of Inside Economics.
The entire global economic order was upended by the dramatic new US tariff policy, announced last Thursday morning.
It sent shock waves around the world.
Investors were braced for a supply shock - with expectations that tariffs should deliver more inflation and higher interest rates.
But the first blast was a demand-side shock based on investor panic about a US recession.
For the record, neither shock is a good one.
In the immediate aftermath of the big announcement, the demand side fears were in ascendance.
Equity markets slumped, oil prices fell to Covid-era lows, the US dollar fell, and the Kiwi dollar spiked to US58c.
US bond yields defied expectations and fell on recession fears.
As that initial shock has been absorbed by markets, things have turned, and inflationary fears are back, pushing US bond yields higher.
The Kiwi dollar yesterday fell back to its lowest level (US55.07c) this year.
Meanwhile, local wholesale interest rates jumped after concerns about US inflation and America’s fiscal situation drove benchmark US 10-year yields to 4.18% from 3.87%.
On Tuesday, New Zealand’s key two-year swap rate jumped to 3.24%, up 14 basis points from Monday.
It has been a maelstrom of financial market reaction in a void of deep uncertainty.
We’ve yet to see the real-world impacts on export prices and consumer confidence.
The swings in sentiment are likely to keep coming for a few days, but the upshot if the tariff policies prove to be both recessionary and inflationary is stagflation – the unlovable combination of rising prices and economic contraction.
While there are not many conclusions that economists can draw just yet, there are some key questions to be considered.
BNZ head of research Stephen Toplis had a go at summarising them this week in his report: Terrifying Tariffs.
“The uncertainty takes many forms,” he wrote.
“What will be the tariff responses around the world?
“How much will it really affect prices and volumes?
“Will there be positive substitution effects for some countries that end up delivering benefits?
“Is this the end of the US as the economic cornerstone of the world’s economy?
“Will China take up that mantle?”
Toplis didn’t hold back in his initial assessment of the tariff fallout.
“The actions of one President Donald Trump simply beggar belief,” he wrote.
“In a matter of days, one man has almost single-handedly knocked the world economy off its pedestal.”
“One thing’s for sure, unintended consequences and unexpected reactions will come thick and fast.”
We’ve spent a lot of time this year talking about New Zealand’s slow and fragile recovery.
Will it stall?
“Probably the best we can say is that there is a clear risk we need to downgrade our growth expectations,” Toplis said.
Finance Minister Nicola Willis held a special briefing yesterday to reassure that things would keep improving.
“This is not a time to dramatically change direction; it is the time to stay the course,” she said.
“Put simply the past week’s global developments make our recovery harder.”
So the risk is real, but what can we do when such tumultuous events are unfolding entirely out of our control?
Keep calm and carry on?
That’s likely to be the tone from the Reserve Bank today as it releases its latest Monetary Policy Review – the first of its post-Adrian Orr era.
Markets have fully priced in a 25 basis point cut to the OCR – taking it to 3.5%.
Economists expect the RBNZ – under the calm and considered leadership of Christian Hawkesby – will stick with the planned rate cut while highlighting risk on both sides of the inflationary equation.
Westpac chief economist Kelly Eckhold yesterday released an update to his earlier OCR preview.
He’s sticking with the call for a 25 basis point cut but says there are now risks that more cuts will be needed this year.
“Markets have moved to price in risks of a much lower OCR over 2025 as the bomb that the US administration detonated on global trade reverberates,” he said.
“The news of rounds of retaliation between China and the US imply very elevated global growth risks. And that bodes poorly for the New Zealand outlook.”
Eckhold said he didn’t expect the RBNZ to “scare the horses” with any radical change in direction.
“We suspect the big update will be in May, where a wide range of outcomes look more feasible (the RBNZ will know the outcome of Budget 2025 by then also),” he said.
“The domestic and global outlook could look quite different by then. And the risk genuinely lies in both directions. NZ Inc could come off not too badly when all is said and done – but that doesn’t mean we will win outright either."
Eckhold also alluded to the latest NZIER Quarterly Survey of Business Opinion (QSBO), which delivered less than spectacular results yesterday.
That added to Westpac’s view that rates could have to go lower, he said.
“We expected a decent bounce in activity indicators and an increase in pricing pressures. In actuality, the growth indicators still look fairly flat,” he said.
The latest QSBO showed a further lift in business confidence in the first quarter of 2025.
A net 23% of firms expected general economic conditions to improve over the coming months on a seasonally adjusted basis, up from the net 9% in the previous quarter, said NZIER principal economist Christina Leung.
“However, the measure of firms’ own trading activity continued to suggest weak demand, with a net 21 of firms reporting a decline in activity in their own business in the March quarter,” she said.
“Similar to the previous quarter, there was a contrast between firms experiencing weak demand and expecting an improvement in the next quarter.”
Despite the optimism about the outlook ahead, continued weakness in demand was still driving caution when it came to hiring and investment, she said.
A net 17% of firms reduced staff in the March quarter, and a small proportion of firms intended to reduce staff numbers in the next quarter.
Also, firms were planning to reduce investment in buildings, plant and machinery.
“This reflects the fact that firms are still holding off on hiring and investment until they have more conviction about a sustained recovery in demand,” Leung said.
ASB’s senior economist also said the survey added to the prospect of the OCR going below 3%.
“Taking the results at face value suggests the economy will struggle for growth in Q1 2025 before a moderate expansion unfolds over 2025,” Smith said.
“We suspect New Zealand sentiment measures will deteriorate in the coming months,” he said.
“We expect a 25bp OCR tomorrow. The issue for 2025 is how much further the OCR will need to be cut if the current market meltdown persists. The odds of a sub 3% OCR by year end have climbed appreciably.”
This week, as part of the Herald’s On the Up series, I talked to ANZ chief economist about what has been going on with both business and consumer confidence. We talk about how material confidence is to an economy and the extent that it represents the missing piece of the puzzle for the economic recovery.
In my column on Sunday, I suggested that the biggest concern in all of this global market turmoil is that it will shatter already fragile confidence of New Zealand consumers and businesses.
One of the few upsides for consumers in the mess of tariff fallout has been a big slump in oil prices.
That ought to mean cheaper petrol at the pump this weekend, even accounting for the low Kiwi dollar.
The price of Brent Crude oil has slumped by 14% since Thursday – down from US$75.95 a barrel to around US$64 yesterday.
That will be a disinflationary force in the economy, which (if prices stay down) could offer some of the inflationary impact of the lower dollar.
Let’s keep the positive tone rolling with a letter from a reader who makes a very sound observation about the possibility that the relatively low tariffs could deliver benefits to New Zealand exporters:
Hi Liam.
Long time reader, first-time correspondent. I hold a few shares of a certain NZ-based manufacturer of rubber farm equipment (gumboots, hoses, aprons etc).
It is a good company but finds itself with about a third of its revenue sourced from the US and suddenly subject to a 10% tariff (I understand most of the goods it sends there are manufactured in NZ).
Of course, the shares have plummeted in recent days, but before bailing on them, I thought I’d look at what their US-based competitors might be facing.
Based on information from the website worldexports.com, the US’ top five sources of raw rubber in 2023 were Indonesia (47%), Thailand (27%), Ivory Coast (11%), Liberia (4%) and Vietnam (3%).
The US sources 90% of its raw rubber from these countries (82% from the top three).
Trump’s tariffs on those countries are Indonesia (32%), Thailand (36%), Ivory Coast (21%), Liberia (10% BBC website) and Vietnam (46%).
Based on these figures, a 10% tariff faced by our NZ company could actually leave it in a better position in the US market than it was prior to the tariffs, since the cost of its competitors’ raw materials will be subject to tariffs two-to-five times the magnitude of those imposed on any final rubber product imported from NZ.
There are many moving parts here, of course, like countries or industries negotiating tariff reductions/exemptions, but based on this not all NZ exporters to the US should be throwing their hands up in despair.
Alain Baillie ... One-time economist and small-time shareholder.
Well put, Alain. This is a great point. I was thinking a similar thing about our wine, which (while facing a 10% tariff) will have an advantage over European wines with a 20% tariff.
So, while it may be cheaper to buy Californian wines, we’ll have an advantage over the French and Spanish for those US consumers who do want to keep enjoying imported wines.
There are going to be all sorts of wins and losses for New Zealand in this strange new world order.
Others have suggested we may see cheaper consumer goods arriving from China and Southeast Asia as those countries look for tariff-free markets.
There’s no getting around the difficult period we’ll be facing in coming months.
But all of us – exporters and consumers alike – are going to need to try and stay positive.
Liam Dann is business editor-at-large for the New Zealand Herald. He is a senior writer and columnist and also presents and produces videos and podcasts. He joined the Herald in 2003. To sign up to my weekly newsletter, click on your user profile at nzherald.co.nz and select “My newsletters”. For a step-by-step guide, click here. If you have a burning question about the quirks or intricacies of economics send it to liam.dann@nzherald.co.nz or leave a message in the comments section.
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