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’s been a long week. With the landslide re-election of Donald Trump, there is much anticipation of a seismic economic shift.
What does he have planned? What does it all add up to? And will he actually be able to do it all?
There’s a lot to work through, as the headline of this column says it could even mean higher mortgage rates here in New Zealand.
That might seem a stretch but international economic analysts at BMI (a division of Fitch group) see a scenario where Trump’s policies force a u-turn on interest rates not just for the US Federal Reserve but for the likes of New Zealand’s Reserve Bank.
Let’s come back to that.
After all the speculation and commentary, I think it’s worth a whirlwind recap of the potential fallout.
We should start with a caveat: no one is sure the extent to which Trump will go through with all the policy promises he made on the campaign trail.
But as BNZ head of research Stephen Toplis warns in his overview that doesn’t mean we don’t have a good sense of what is coming.
“Folk often say Trump is unpredictable but we beg to differ. The direction of policy is highly predictable. What is unpredictable, however, are the specifics with the more extreme edges of his policy prone to restraint,” he says.
Some big assumptions we can make are that there will be more tariffs, lower taxes and less regulation of financial markets and the corporate sector.
Perhaps the final details will be more moderate than what’s been talked up, but regardless, we can paint a broad outlook for New Zealand. BNZ’s Toplis does just that with a short and pretty gloomy summary:
“Lower domestic growth, as exports are adversely impacted, and global growth suffers — a lower NZD than otherwise would have been the case — higher inflation, in part driven by that weaker NZD — higher interest rates than would otherwise have been the case. "
Singapore-based analysts at BMI took a similar view this week and clipped their New Zealand growth outlook for 2025.
BMI is now predicting our economy will grow just 1.8% next year — down from a previous forecast of 2%.
It could be a lot worse of course.
Fitch Ratings (also part of Fitch Group) has produced some analysis of the impact of increased US tariffs on Sovereign Credit Profiles. It concluded that the outlook is worst for Mexico, Canada, China, Vietnam and Korea, which identifies as being the “most exposed to aggressive increases”.
It warns that the hit to GDP is significant for many more economies — including developed markets in Europe — in scenarios where US tariff hikes prompt wider tariff escalation.
Listen: Liam Dann talks about the limits of Trump’s power:
That includes us, although we aren’t big enough, or exposed enough (thankfully), to warrant a special mention in that report.
The Financial Times says Citi analysts have estimated that in an extreme scenario, in which Beijing was unable to divert some of its trade to the US through other countries, Trump’s 60% tariff would knock 2.4 percentage points off Chinese GDP growth.
That sort of shock to China would have a terrible knock-on for New Zealand. Although one would hope that A) Trump pulls back from the full 60% tariff on China and B) the world would happily absorb (at least partially) a wave for cheap Chinese goods, such as electric cars, appliances and solar panels.
BMI’s New Zealand-focused report echoes those concerns about tariffs and also raises the unnerving prospect that Trump’s policies might force central banks around the world to start hiking rates.
“A second Trump presidency could have profound implications for developed market (DM) economies, including New Zealand, particularly those with substantial trade relationships with the US,” BMI said.
“The policies implemented during Trump’s first term, especially those related to trade, have already demonstrated the potential for significant economic disruption. Factors such as economic openness to trade, the intensity of trade ties with the US, and the effects of trade tariffs on global and national growth are likely to converge, potentially curbing growth momentum.”
These factors could influence financial conditions, consumer spending, and corporate investment, although the scale of the potential impact remained uncertain.
Trump’s proposed policies — including tax cuts, trade tariffs, and deficit spending — could also trigger a fresh wave of inflation.
“This scenario would likely compel the US Federal Reserve to halt its easing cycle and, in the worst-case scenario, potentially reverse it,” BMI said.
“If this happens, the RBNZ, along with other [developed market] central banks, might be forced to either slow down their own easing cycles or outright raise interest rates to combat inflation.
“Such actions would lead to higher borrowing costs, potentially stifling growth and increasing economic uncertainty. The adverse effects of this scenario would negatively impact consumer spending and corporate investment, ultimately hindering overall growth in 2025.”
For the record our own RBNZ has already warned Trump’s policies look “marginally inflationary”.
“On the margin, it’s a higher inflation package than the alternative, but one that’s very much manageable in the world of operationally independent central banks,” deputy governor ChristianHawkesby told Parliament’s Finance and Expenditure Committee last week.
“That’s the central case. It’s manageable. There are risk scenarios around that, and that all relies on whether the tit-for-tat escalation [occurs], who does what in response, and whether things sort of broaden out from there.”
It’s not all bad. Have you checked your KiwiSaver account recently?
The Trump bump has been a doozy so far. The S&P500 is up 5% since last Monday, the Nasdaq is up 6%. On the flip side bond yields have also risen sharply. In fact, they were rising for weeks in advance of the election as markets correctly picked that Trump was going to win.
Described as the “Trump trade” the rise of bond yields is predicated on the idea that big tax cuts will require additional US borrowing — meaning more US bonds will need to be issued at higher interest rates.
As mentioned above orthodox economic assumption is that his policies will put upward pressure on inflation means the US Federal Reserve isn’t able to cut the official cash rate as aggressively as it might have or might even have to raise rates.
One way Trump has threatened to resolve that is by legislating to take more direct control of the US Federal Reserve. That would worry bond markets even more.
When other autocratic leaders in other countries have tried to swim against the global financial tide like that it has always ended badly.
Argentina and Venezuela, Brazil, Greece, Turkey and many others have felt the wrath of bond markets, which can push a country’s interest rates so high that new borrowing becomes impossible and servicing existing debt becomes crippling.
Even the UK wasn’t strong enough last year to push against bond markets when Conservative Prime Minister Liz Truss tried to cut taxes without having properly funded the deficit it would create. She was forced to resign.
The US is more powerful again and has much deeper reserves of credit with the world. No one really knows how far Trump can push the boundaries of orthodox policy.
Normally the mere threat of this stuff would be bad news for equity markets. But Wall St doesn’t seem bothered yet.
Either sharemarket traders don’t think Trump will push his policy plans to extremes that would damage the US economy or they just aren’t interested in looking that far ahead.
He doesn’t even take control until January 20 ... why worry?!
In the very short term, it’s not hard to see why the equity markets were ready to party.
One reason was just the clarity of the result. Fears that the election would be so close that there was no result for days weeks or even months, and that it might cause conflict and social unrest, did not come to pass.
Relief at the prospect of the Democrat’s corporate tax hikes has also driven some of the exuberance. But there’s no doubt that anticipation of Trump tax cuts and deregulation has kept the party rolling.
He’s going to have to deliver something. But it’s a delicate balance because if it looks like he’s doing too much and the bond yield keeps soaring then markets may turn against him.
If they do turn then they’d likely turn fast. This latest spike on Wall Street comes after a strong run over the past year and many analysts already thought stocks were overvalued — especially tech stocks.
A sceptic might suggest that removing financial regulations and implementing policies to further fuel an inflated bull market —as you head into a showdown with the bond market — is a recipe for an epic crash at some point in the next couple of years.
But nobody likes a negative nelly.
In theory, an autocratic leader doesn’t have to worry about market reactions. Trump will have control of the Senate and most probably the rest of Congress so he’ll have as much power as any US President can have.
But he stakes his reputation on being a market champion. He and his powerful backers — such as Elon Musk — have a lot riding on the strength of the US financial system. So, in the absence of political opposition, we may yet see Wall Street setting the outer limits of what it can do.
If you thought equity markets were bullish, check out the crypto-bro party.
Bitcoin has soared to new heights above US$88,000 (NZ$149,000) on expectations that an Elon Musk-backed Trump administration will be more cryptocurrency-friendly.
What that actually means isn’t clear. But crypto traders aren’t waiting to find out.
The value of the global cryptocurrency market has topped $3 trillion for the first time in three years.
Trump and his administration can certainly be expected to offer up a favourable regulatory environment and remove any last roadblocks to cryptocurrencies being treated as a legitimate investment class.
He has even indicated he’s in favour of creating a national reserve of Bitcoin — a bit like the Gold reserve. That would pump the price further still.
Bullish executives anticipate a radical shift in policy in Washington, cheering the end of the Democrat administration, which was perceived as more openly hostile to crypto, the FT reports.
Whether Trump can actually enable cryptocurrencies to leap from speculative investments to a viable means of exchange is less certain.
The sceptic in me (there he goes again) can’t help but note that Bitcoin launched in 2009 — that’s 15 years now without having any widespread adoption as a currency by the public.
Also, you have to wonder why a US President would want to undermine the global supremacy of the greenback as the world’s reserve currency.
That advantage might be the only thing keeping bond markets at bay if your other policies involved inflationary tariffs and deficit-detonating tax cuts.
Perhaps a US energy boom will keep the US economy on track. “We have more liquid gold than any country in the world — more than Saudi Arabia,” Trump said last week.
It’s not clear whether that’s really true. Saudi Arabia is still considered to have the largest oil reserves in the world. The US might have more recoverable oil but some of that is pretty marginal and expensive to get out of the ground.
Regardless Trump’s election has been celebrated by the US oil and gas industry.
“Drill baby, drill,” he said at a rally on the campaign trail — a statement typically short on detail but yet ruthlessly concise in its messaging.
Unlike other markets, there hasn’t been much in the way of price movement to reflect the prospect of more US oil coming onstream.
Oil prices have bumped around in the same sort of range we’ve seen for several weeks.
Analysts warned a rapid increase in output during Trump’s second term was unlikely, the FT has reported.
“The market is oversupplied because the Chinese economy is not delivering the kind of demand that it has in the past,” said Daniel Yergin, a Pulitzer Prize-winning energy historian and author of The New Map. “That is the biggest overhang for the global and US oil industry.”
Production has already hit record levels during Biden’s term in office, with a fresh high of 13.4mn barrels a day in August despite the regulations.
“Investors — burnt after years of debt-fuelled drilling binges — are keen for companies to prioritise returns over growth. The model of capital discipline they have imposed on the sector is unlikely to change,” the FT says.
So, basically, world demand is so low the US can’t just push more oil onto the market without depressing prices, which makes more drilling unprofitable.
And then of course, thanks to Trump’s tariff plans the world economy is expected to face further headwinds to economic growth.
Remember that 2.4% hit to China’s GDP that Citi analysts warned about (above) ... that won’t do anything for oil prices.
The more you look at the ramifications of Trump’s loosely formulated and contradictory policies the more it looks like an economic disaster in the making for the US and, by association, the rest of the world.
But there’s another more palatable scenario. One that involves him only ever implementing a fraction of what he’s talked about on the campaign trail.
There will be moves in all the directions he’s talked about. But those moves won’t be as big as he promised and most of his faithful supporters will remember or care.
Meanwhile, a tight-knit group of powerful oligarchs will ensure that he doesn’t go so far as to actually cause a global financial crisis ... surely. Surely!
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.
The Kiwi is under pressure as the US dollar rises on expectation of higher interest rates.