Too close to call, but what might a Trump or Harris win mean for New Zealand? Photo / AFP
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 to 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.
With just a week to go until the US presidential election, it’s time to embrace the craziness of US politics and try to make sense of what it might mean for us down here in New Zealand.
This being an economics column, I can conveniently leap across the bitter social and cultural divide that dominates the political discourse.
Instead, let’s look at the macroeconomic implications of a Kamala Harris or a Donald Trump win. It’s safe to say there is a fair bit of uncertainty. Harris has been light on policy detail and Trump has often been unrealistically specific – to the point that many analysts doubt his ability to follow through.
Let’s look at a global perspective first, courtesy of economists at Singapore- and London-based Capital Economics ...
The team at Capital Economics say they suspect Trump’s proposed curbs on immigration and new tariffs would be “stagflationary”.
Which is to say the policies would be inflationary while actually decreasing economic growth.
But Capital Economics is sceptical about Trump’s promises about big tax cuts so doesn’t hold out much hope for fiscal stimulus.
“Given the risk of an adverse reaction in bond markets, we are not convinced that Trump would push hard for another large package of deficit-financed tax cuts,” the economists write.
Meanwhile, they say a Harris victory would have no impact on our economic forecasts, “except in the unlikely event that the Democrats also win complete control of Congress, which would boost the odds of a modest fiscal stimulus”.
Trump has said a lot of things on the campaign trail but there is still massive uncertainty surrounding exactly what policies he would (or could) implement.
“We believe that Trump could impose new tariffs – a universal tariff of 10% and tariffs on China of 60% – relatively quickly by declaring a national emergency,” Capital Economics says. “Assuming the revenues from the new tariffs are recycled into the economy, we would mark down our GDP growth forecast for 2025 by 0.3% points and add 1% points to our inflation forecast.”
The economists note they are also a lot more sceptical than many that a 2024 Trump win will mean even more fiscal stimulus.
“We suspect the threat of a seriously adverse reaction in bond markets will rein in Republicans’ desire for tax cuts and limit them to extending the original Trump tax cuts due to expire at the end of 2025,” they write.
“A Trump win would lead to higher US yields (on account of both an upward revision to Fed rate expectations and higher term premia) and a stronger dollar across the board. We also think a Trump win would, at least initially, boost the US equity market (and outperformance of US equities vis-à-vis the rest of the world).”
Conversely, a Harris win would probably lead to lower Treasury yields and a weaker dollar.
“It may also put some pressure on the equity market in the near term, at least in the event of a Democratic sweep (a Harris presidency constrained by a Republican Congress would most likely not be able to pass a corporate tax hike).”
Finally, they note, that the one thing global financial markets don’t want to see is an unclear or contested outcome.
That could result in a period of “worsening risk sentiment (lower yields, stronger dollar and other safe-haven currencies, and weaker equity markets), until that uncertainty was resolved”.
As a small trading nation that relies on exports for its livelihood, there are some serious concerns on the horizon with regard to US trade policy.
Chris Nixon, a principal economist at the NZIER, has taken a look at the implications of the election for New Zealand and warns that we may be facing a lose/lose scenario on trade.
“The current situation is a bad place to start – whoever gets in,” he begins. “The world trade landscape is dominated by Trump even though he has been out of office for four years. The US$300 billion [$501b] of Chinese tariffs remain, and for good measure, Biden has added a further US$18 billion.”
US tariffs and retaliation to those tariffs have had a chilling impact on the United States and world economies, he writes.
“Not only do we have the United States taking its ball and going home on trade policy, but it has also tried to slowly strangle the WTO [World Trade Organisation] by refusing to appoint judges to the appellate board, halting the dispute settlement process.”
Nixon says the impact of the tariffs thus far has been to push the US dollar up, making its exports less competitive and increasing prices at home.
So for New Zealand commodities, further tariffs in the United States might not be so bad from either Trump or Harris.
“Trade may still remain steady despite the extra tariffs signalled by Trump,” Nixon says. “The real problem is that the United States is the engine of the world economy. Countries that have been exposed to the United States market have suffered and will suffer more. This negatively impacts the New Zealand economy since we are exporters to the world.”
US exports may remain strong, but exports to the rest of the world will fall.
Unfortunately, while Trump is the one talking big about new tariffs, they’ve become one of the few areas of bipartisan agreement in US politics.
“We know that tariffs are the answer to everything for Trump/Republicans,” Nixon says. “But the real worry is that Harris/Democrats will also be seduced by their allure. We are very unlikely to see the United States do a backflip of tariff policy.”
“The world has been here before with the infamous Harley-Smott tariffs of the 1930s. “They may not have caused the Great Depression, but they did not help,” Nixon says.
The world certainly doesn’t need a renewed round of trade wars next year. Last week, the International Monetary Fund (IMF) lowered its global growth forecast for 2025 and warned of accelerating risks from wars to trade protectionism.
Global output will expand 3.2%, 0.1% lower than its July estimate, the IMF said in an update of its World Economic Outlook. It left the projection for this year unchanged at 3.2%.
The gap between European and US gross domestic product is set to widen further by the end of the decade, the IMF warned on Thursday, as it sounded an alarm about the continent’s “lack of business dynamism”.
The IMF said in its latest economic outlook for Europe that an ageing workforce and low productivity growth would reduce the continent’s annual GDP growth rate for the 10 years until 2029 to just 1.45%. In the US, the average growth rate over the same period is estimated at 2.29%.
US growth has outpaced Europe’s since the Global Financial Crisis (GFC), particularly since the Covid-19 pandemic.
The graph below – highlighted in a recent Financial Times article – shows how the extremely partisan nature of US politics has distorted traditional economic barometers like consumer sentiment surveys.
Democrats overwhelmingly see the economy as good right now and Republicans see it as bad. The reverse was true when Trump was in power.
We know in this country (thanks to some research by NZIER) that business confidence surveys skew higher by a few points when National is in power. But, thankfully, we have nothing like the division they now have in the US.
One assumes American economists have to look to independents for a less partisan line on sentiment.
Financial Times writer Paul Donovan notes that partisanship is a relatively new thing. “Before the Obama presidency, the evidence of political bias in survey responses was far more muted,” he says.
Last week, I noted that the stability of oil prices was mildly reassuring against a backdrop of conflict in the Middle East that threatened to escalate. The theory was that as long as prices remained relatively low and stable, it was a sign that traders didn’t see World War III kicking off.
The spanner in the works was the expectation that Israel could respond to earlier missile strikes by Iran and that would send prices soaring.
Well, at the weekend Israel retaliated and since then, oil prices have plunged. Brent Crude prices dropped almost 6% after the strikes on Saturday to trade just above US$71.
The price plunge provided a good reminder that speculative trading of volatile commodities is never a straight bet. Prices fell because the Israeli action didn’t target oil or nuclear facilities in Iran (probably to appease the US). So effectively the scale of the strikes was less significant than the expectations that had already been priced into the market.
Good news then. The conflict hasn’t escalated. And (if we pull back to just the macroeconomics) petrol prices continue to provide fair winds for further falls in inflation.
It was just an analogy but I thought it was pretty solid. Writing in my Sunday column three weeks ago, I took a look at the capital gains tax debate and concluded that - like worrying about the Black Caps winning in India - it wasn’t worth getting worked up about, because while it might happen one day, there was little immediate prospect.
Well, the Black Caps did the unthinkable and won the first two tests to win a series on Indian soil for the first time in their history.
Now, I’m not saying the odds of Kiwis embracing a capital gains tax have necessarily improved. The current Government is unlikely to go near one.
But a poll out this week showed the highest levels of support seen yet amongst the general public. The Ipsos New Zealand Issues Monitor found almost two-thirds of New Zealanders support a capital gains tax in some form.
Sixty-five per cent of respondents said they would support a capital gains tax in some form. The most-supported capital gains tax situation is for the sale of an investment property (57% support), followed by the sale of a business (43% support).
However, a large majority of New Zealanders do not support a capital gains tax on the sale of a family home, which was opposed by 78% of people. There was also strong opposition to a capital gains tax on other assets such as boats, cars and paintings, which was opposed by 64%.
For the record, I argued that I’d be okay with a capital gains tax if it was revenue neutral ... ie, not a tax grab by the Government. So we’d see lower income tax offsetting any new taxes on capital gains.
The reason we need to make a change is just down to demographics.
Our population is ageing. In the coming years, we are going to have considerably more retired people to support and relatively fewer workers paying income tax to pay the superannuation and healthcare bills.
Over the next 30 years, according to Stats NZ, New Zealand’s population of seniors is expected to grow from about 850,000 (17% of the population) to 1.5 million (24% of the population).
Hiking income tax on an ever-smaller proportion of Kiwis isn’t realistic or fair. It will disincentivise work and send young people offshore, exacerbating the problem.
So unless we want to cut spending massively, we need to look at the structure of our tax system.
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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