Global uncertainty could stall New Zealand's economic recovery. Image / 123rf
Global uncertainty could stall New Zealand's economic recovery. Image / 123rf
Opinion by Liam Dann
Liam Dann, Business Editor at Large for New Zealand’s Herald, works as a writer, columnist, radio commentator and as a presenter and producer of videos and podcasts.
Donald Trump’s new US trade policy is causing global economic uncertainty and market volatility.
Economists warn of potential recession risks, but the direct impact on New Zealand exports is manageable.
Maintaining confidence is crucial to support the fragile economic recovery amid these challenges.
Perhaps the biggest concern for New Zealand in all of this tariff and trade turmoil is simply the hit it delivers to our confidence.
Our economy has just begun to see signs of a real recovery, but it is fragile and very much hinges on our collectivebelief that things are on the mend.
We need more confidence in this economy, not less – and the events of the past few days sure don’t help.
That’s a big call when you consider we’ve just been through a global pandemic.
US economist Paul Krugman, a Nobel Prize winner, warned this was “a bigger shock than the infamous Smoot-Hawley Act of 1930″.
That was the tariff policy the US introduced to try to refloat its economy after the 1929 stock market crash.
It was a failure that pushed the world into the Great Depression. At least, that was the widely accepted view among economists (of all stripes) for decades. Until now. Trump says the economists are all wrong.
The imposition of tariffs after the 1929 stock market crash helped push the world into the Great Depression. Photo / Getty Images
Right or wrong, we need to buckle in for a wild ride as financial markets process the fallout.
Where it is all going to land is far from clear at this point.
It’s a little bit like – dare I say it – when the pandemic hit.
The most recent example economists had to work with back then was the flu pandemic of 1918.
Well, Fitch Ratings says Trump’s “Liberation Day” announcement takes US tariff rates back to a level last seen in 1909.
Once again, we are in uncharted territory.
For example, in the lead-up to Trump’s big reveal on Thursday, conventional wisdom had it that imposing new tariffs would push up the US dollar and interest rates.
If Americans spend less on imported goods, they need less foreign currency, so the greenback should be stronger.
Tariffs are also expected to be inflationary, adding costs for US consumers. So that should mean higher interest rates, which also put upward pressure on the dollar.
That didn’t happen. The US dollar tanked.
US bond yields also fell, suggesting interest rates will go lower, not higher.
US President Donald Trump's tariffs ought, by conventional economic thinking, to raise US inflation and interest rates. But if the shock to the markets is enough to cause a US or global recession, then the opposite could be the case. Photo / AFP
What seems to be happening is that fears about tariffs pushing the US into recession are dominating market thinking.
Concerns about inflation are still there but are secondary – for now, at least.
So when people ask what this means for mortgage rates in New Zealand, it’s impossible to answer with certainty.
Tariffs should be inflationary in the long run, requiring higher interest rates.
But if the shock of the tariff upheaval is enough to cause a US or global recession, then the opposite will be the case.
Right now, I don’t think anyone can say for sure.
I’d expect our Reserve Bank to stick to its planned 0.25-basis-point cut on Wednesday and watch closely to see whether a strategy change is needed.
I guess we can be sure that equity markets did not like the tariff news.
Wall Street had its biggest one-day fall since 2020.
So if you’re looking for some certainty, I can confirm that your KiwiSaver will be down.
But I’d also recommend you not to look for a bit.
Beyond that, we can’t even be certain that the tariffs announced on Thursday will be the ones we eventually see enacted.
Trump’s executive order suggested that there would be scope for negotiation.
How much and with whom? Who knows?
Perhaps we’ll see some of the most dramatic tariffs dialled back.
But there is also a risk that the likes of China and Europe will retaliate, which could mean it all escalates.
That’s what sank the world economy in the 1930s.
There are so many variables to consider that trying to forecast an outcome seems futile right now.
Our exporters will need to be agile and ready to adapt.
The good news is that we have a solid track record on that front.
New Zealand is good at trade.
Economists have suggested the 10% direct tariffs imposed on our US exports – predominantly beef, dairy, wine and tech – are manageable.
At face value, if we bear the full cost, we’re looking at a $900 million hit – or 0.2% of GDP.
That’s a simple equation: 10% of our total export earnings ($9b) from the US last year.
And we may not bear the full cost. The US doesn’t have enough low-grade domestic beef for its hamburger market and relies on imports from New Zealand and Australia.
If demand is strong enough, they’ll still buy it and US consumers will have to bear the extra cost.
Also, in relative terms, our direct tariffs are lower than many other nations.
So, for example, our wine may cost more in the US but could have a competitive advantage over European wine, which faces a 20% tariff.
Direct tariffs shouldn’t sink our recovery.
But the risk of a major financial crisis or a global economic slowdown is more serious.
It is also less tangible. We don’t know how big the impact will be or how rapidly we’ll feel it.
In the meantime, what can we do?
Well, we can try to stay positive.
We can’t let the fear of the unknown sink our confidence and undermine the fledgling domestic recovery.
That’s not going to be easy, because the financial headlines coming at us aren’t likely to be heartening in the coming days.
I’d hope to see some strong and reassuring leadership from the Government in the days and weeks to come.
If Prime Minister Christopher Luxon needed a crisis to prove his stripes, this may be it.
Kiwis are already feeling battered and frayed after going through the post-Covid economic wringer.
Now, we face another challenge. We need to breathe deeply and summon the strength to rise to it.
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.
