US President Donald Trump's tariffs have created global economic uncertainty.
OPINION
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Let’s face it: there is never much certainty in economics.
“The only function of economic forecasting is to make astrology look respectable,” the renowned United States economist John Kenneth Galbraith once said.
It’s true, forecasts are never guaranteed, but when there are clear precedents to work with, they can offer a pretty accurate guide to the direction an economy is travelling.
US trade policy has upended the economic order and, with it, whatever precedents we might have had about the domestic economic outlook.
New Zealand did seem to be on a slow and steady path to a cyclical recovery – export prices have been good, tourism numbers were recovering, and confidence was coming back.
I hope all that hasn’t been derailed, but the fallout from US tariffs is coming thick and fast.
So far, we’ve seen a financial shock to equity markets. We’ve seen oil prices slump on the expectation of lower global demand.
We’ve seen the Kiwi dollar rise then fall, and then rise again.
I suspect we’ve also experienced a hit to both consumer and business confidence, although we won’t know for sure until the next round of monthly surveys.
Ultimately, I think retaining confidence that there is still a recovery happening will be one of the keys to it happening.
Reserve Bank chief economist Paul Conway gave a speech about the science (or art) of forecasting yesterday.
He struck a careful balance, maintaining the relevance of forecasting while emphasising just how conditional they were on ever-changing inputs.
“I can not overstate the conditionality,” he said.
I suspect the RBNZ is still smarting a bit from the confusion or controversy (depending on your point of view) about its published rate track in May last year.
That track suggested the Official Cash Rate would rise further and wouldn’t be cut until August this year.
As it turned out, the OCR was cut in August 2024.
Critics called it a U-turn and a flip-flop.
Then-Governor Adrian Orr argued there was a misunderstanding around interpreting the rate track.
In his speech, Conway emphasised the track “should almost never be interpreted as a guarantee of future Monetary Policy Committee decisions”.
It was the RBNZ’s best estimate of how the OCR would need to change over the forecast period to meet its inflation objective, conditional on the economic outlook, he said.
“That last bit – conditional on the economic outlook – should be read as being bolded, highlighted, and jumping off the page like a neon sign,” he added.
“I cannot overstate the importance of this conditionality.”
If the economic outlook changes, which it almost always does to some degree, then our projection for the OCR will also change.
Asked about the renewed uncertainty following all the tariff turmoil, Conway was cautious.
He pointed people back to the scenarios outlined in February’s Monetary Policy Statement.
Conceptually, it was all there: weaker global demand, a global economy that is less efficient, and fallout through financial channels like the currency and longer term interest rates.
Looking ahead, the RBNZ was using a state-of-the-art global macro-model to look at all possible outcomes.
“We’re using that to calibrate the shock,” he said.
As for how bad that shock might be, we’ll have to wait for the RBNZ’s verdict when it publishes a new OCR track and updates forecasts at the next Monetary Policy Statement on May 28.
Perhaps the state of world trade will be a bit clearer by then too.
Nowcasting
Meanwhile, for those wanting a more up-to-date read on the economy, the RBNZ has launched its own “nowcasting” model to try and track GDP in close to real time.
“Nowcasting uses a vast array of more timely data – such as from business surveys, financial markets, consumer spending, traffic movements, and internet search trends – to estimate current economic conditions well before the official numbers are released,” Conway said.
Massey University has been running a similar model for several years and Westpac runs one now too.
The RBNZ has called its tracker Kiwi-GDP and is publishing the latest data every Friday afternoon on its website.
For the record, the latest trend on Kiwi-GDP doesn’t look great. It shows a dip in the estimated growth rate for the current quarter – from about 1% (at the start of the month) to 0.8%.
This week, Kiwibank economists had a go at putting a framework around the tariff uncertainty by publishing three scenarios for New Zealand’s economy.
I think it helps to have a best-case, worst-case and central scenario in mind when thinking about the future.
The good news is that Kiwibank picks the worst-case scenario as the least likely to happen.
The bad news is that even the best-case scenario is not great and will require the Official Cash Rate to be cut below 3%, they say.
Let’s get the worst-case scenario out of the way first.
Worst-case scenario
This sees negotiations going badly and a return to something like the original ‘Liberation Day’ reciprocal tariffs.
It also assumes that the standoff between China and the US remains largely unresolved.
“All downside risks end up with materially lower US, Chinese, and European growth. Global growth is slashed,” Kiwibank says.
“The terms of trade shock faced by New Zealand is enough to push the economy back into recession.
“The RBNZ 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. And the cash rate, well, the cash rate of 3.5% needs to be halved, asap. We could easily see the cash rate headed towards 1.5% or lower.”
That’s pretty grim. But when it comes to psychologically preparing for uncertainty, it’s good to know what we could be facing.
Best-case
Kiwibank’s upside scenario suggests US President Donald Trump gets the deals done with most trading nations quickly.
It implies that we get close to 10% tariffs across the board, excluding China and the European Union.
It’s hard to imagine a scenario where China and the EU don’t face higher tariffs, at least for some goods, Kiwibank says.
It also acknowledges that we may see some goods headed to New Zealand at a discount.
“Our upside scenario is a terms of trade shock, but not a bad one,” they say.
“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.”
This optimistic outlook still demands an RBNZ cash rate below 3%, Kiwibank says.
“The need to stimulate with a terms of trade shock is obvious. Our forecast 2.5% cash rate is still required, even if we get nothing but good news from here.”
Central case
The central – and most likely case – Kiwibank presents is one where tariff uncertainty lingers much longer than we’d like – months, not weeks.
It does involve tariffs landing lower than those proposed on ‘Liberation Day’ – perhaps mostly close to 10%.
But, the prolonged negotiations would leave the global economy in a heightened state of insecurity.
Volatility would continue in all markets, and global growth would be significantly lower.
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.”
Treasury published an unnervingly timely report last week looking at how New Zealand policy might be best to cope with another major crisis – like an earthquake or pandemic ... or a trade war perhaps?
It concluded that the Reserve Bank should be the first line of defence.
Treasury’s view largely lines up with that of Finance Minister Nicola Willis and current Government policy, Herald Wellington business editor Jenée Tibshraeny noted in her coverage.
“Fiscal policy should be used sparingly. Rather, monetary policy should take the lead role in smoothing economic cycles and responding to crises affecting the whole country,” the Treasury’s report said.
“Where fiscal policy is used, it should be timely, temporary, and targeted, with clear exit strategies.”
In other words, we shouldn’t expect the Government to come to the rescue with stimulus in any of the likely downturn scenarios posed by global trade wars.
Of a return to the kind of money printing for large-scale asset purchases (LSAP) that we saw in the pandemic.
“Alternative monetary policy tools can be effective in supporting monetary policy objectives, although there remains uncertainty about the size and timing of impacts,” Treasury said.
“For example, LSAPs have a clear role in addressing financial market dysfunction, but their impacts outside of this situation have proven harder to estimate.”
Treasury noted the direct cost to taxpayers of the LSAP programme is estimated to hit $10.5 billion.
Luckily, there is still plenty of scope for the Reserve Bank to cut interest rates.
The spanner in the works for stimulatory rate cuts would be a resurgence of inflation.
Tomorrow, we’ll see the CPI inflation data for the first quarter of the year, and it is likely to have risen.
Economists are predicting it will come in at about 0.8% for an annual rate of 2.8%.
The culprit is food, which has been creeping up on the back of strong commodity prices for dairy, meat, and chocolate.
Yesterday, Stats NZ’s partial CPI indicator, the Selected Price Index, showed that food prices were up 3.5% in the year to March.
Butter prices are more expensive by 63.6% compared to March 2024, cheese is up by 20.4%, and milk is more expensive by 16%.
The average price for a 250g block of chocolate was $5.99 in March 2025, which is $1.60 more expensive than three years ago, Stats NZ said.
The good news is that this is all tradeable inflation – the imported kind – and is likely to be temporary.
Meanwhile, economists expect domestic – or non-tradeable – inflation will continue to ease, given the sluggish state of the economy.
Thursday’s data won’t capture the big fall in oil prices we’ve seen either.
That slump from US$75 a barrel to around US$64 a barrel is going to help ease inflation.
Beyond that, where commodity prices land as the tariffs bite is highly uncertain.
Which brings us full circle to the unfortunate reality that, for the time being at least, we’re going to have to live a bit of extra uncertainty.
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.