Inside Economics: NZ recession risks on the rise ... again! Plus: the boy who cried ‘tariff’ – Trump’s threats lose their bite

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.

Recession fears resurface

Nobody wants to be talking about another recession; we’re supposed to be recovering from the last one (or was that two ... or three?).

But sadly, there are some worrying signs that the fragile recovery petered out in the second quarter.

Both the Production of Services Index and the Production of Manufacturing Index contracted again in June.

These measures of business performance suggest that a large chunk of the economy is still in recession.

The Production of Services Index recorded its fifth successive contraction in June.

Apart from a positive bounce in January this year, it has been in contraction since March 2024.

That’s a hell of a tough run and reflects the gloom we’re hearing from hospitality, retail and professional services.

Meanwhile, manufacturing, which had started to pick up, faltered for the second month in a row in June.

That’s prompted BNZ head of research Stephen Toplis to publish a very gloomy note, revising down his expectation for the second quarter GDP to -0.2%.

“The last few days have seen a number of high-frequency activity indicators support our view that not only did the economy stall in the June quarter, but it is also struggling to gain momentum going into [the third quarter],” Toplis writes.

“Indeed, so poor have these indicators been that we have lowered our expectation for Q2 GDP to -0.2%, from zero, and have made exactly the same adjustment for Q2 employment.”

Meanwhile, the Real Estate Institute of New Zealand (REINZ) Property Report for June showed the housing market remains subdued, with median house prices down again in Auckland.

Commentators have focused on the oversupply of properties on the market and a lack of demand from buyers because of job market insecurity.

We need the job market to improve to boost house prices, but we need house prices to improve and boost consumer confidence to improve the job market.

Likewise, housing market demand is suffering from the falling net migration rate, but that won’t turn around until the job market improves.

The circuit-breaker might be more interest rate cuts from the Reserve Bank (RBNZ).

But the RBNZ hit pause last week because of short-term inflation concerns.

Of course, the recessionary conditions are meant to mean inflation will keep falling and the RBNZ will be able to cut further eventually.

For now, though, we’re stuck in a frustrating deadlock that risks further undermining already-weak business confidence.

Lucky country?

What’s worrying about the situation is just how bad it would be if the agricultural export sector weren’t enjoying its biggest boom in years.

We don’t have any control over export prices or agricultural production conditions, so you’d have to say we got lucky, although I suspect struggling retailers are feeling anything but.

What we desperately need is for the domestic economy to pick up before the export price cycle turns against us.

There is still hope, even though the wheels are turning painfully slow.

I think the elevated export earnings will eventually work their way through to the urban economy.

Economists also point out that the cuts the RBNZ has already made are still working their way through to consumers’ pockets.

Core retail spending was up in June, although Westpac economist Satish Ranchhod notes that rising grocery prices probably counted for some of the extra spending in the consumables category.

More promising were increases in durables and apparel. Hospitality continued to struggle.

As Ranchhod notes in his analysis, retail spending isn’t going to pick up rapidly.

But households with mortgages should see considerable relief in the coming six months.

“Compared to this time last year, fixed-term mortgage rates are around 170 to 200bps lower,” he said.

“The full impact of those declines is yet to be felt as most New Zealand mortgages are fixed for a period.”

Over the next six months, around half of all mortgages would come up for refixing, giving many borrowers the chance to secure a much lower rate, Ranchhod said.

“The related increases in disposable income levels will be a boost for sentiment, and that should support a gradual recovery in spending as we approach the end of the year.”

It feels like we’ve been saying that for two years now – but hang in there.

Something’s got to give eventually.

Tariffs? What tariffs?

In my diary, August 1 looks to be looming fast. But Wall Street investors seem to have decided that the new tariff deadline imposed by Donald Trump is too far away to worry about.

Markets shrugged off his latest threats to impose 30% tariffs on the EU and Mexico, 35% on Canada and raise the base tariff for all countries from 10% to 20%.

Wall Street indexes continued to trade near record highs on Monday.

If the investors took these threats at face value, they would be extremely worrying, but I don’t think anyone does anymore.

The story of The Boy Who Cried Wolf comes to mind.

Donald Trump's endless tariff threats are being treated as akin to one of Aesop's Fables.

Leading with a big, aggressive threat is clearly a negotiating tactic for Trump.

But each time he does it and then backtracks, he weakens his hand.

Trump knows the risk of pushing too hard is that he’ll cop an ugly Wall Street sell-off or a bond market rally that pushes up interest rates.

His strategy has been to push to the limits of market tolerance and then pull back.

He hasn’t managed to do that this time.

In the long run, Trump will likely achieve his goal of higher tariffs across the board. He’ll have changed the global trade landscape and will be able to claim victory.

In the short term, though, he’s struggling to deliver the big bang he promised in April.

No one really believes the big, scary numbers he plucks out of the air any more.

Eventually, markets will have to grapple with the reality of higher tariffs. For now, they seem comfortable treating Trump’s big proclamations as entirely hypothetical.

The real measure of tariff impact

The real measure of tariff damage arrived this morning in the form of the latest US Consumer Price Index inflation data (for June).

By the time you read this, the numbers will be out already, and I’m loath to make any predictions.

But whether good, bad or ugly, markets are likely to take the data a lot more seriously than the latest pronouncements from the White House.

The inflation rate is a number that will have a direct bearing on the US Federal Reserve’s plans for rate cuts (or lack of them).

Investors will be watching closely to see what impact the first round of tariffs has had on pricing.

(Update: US annual inflation rose to 2.7%, and Wall Street sold off by about 0.5%)

Meanwhile, in New Zealand, we’ll get our Consumers Price Index (CPI) data for the second quarter on Monday.

Economists expect it will remain higher than the RBNZ would like. BNZ is pencilling in 0.8% for the quarter (from 0.9% in the March quarter).

Butter Battles

Q: Hi, can you please explain the economics of a pound of butter made from milk acquired from cows in Waikato and processed nearby into a product on the supermarket shelf in Hamilton costing me the equivalent of the same product in London?

Various sources report the costs of transporting goods within New Zealand at 40% of a product’s price, so I wonder how an economist can not account for the enormous expense of getting the pound of butter, the bottle of wine, the leg of lamb, the side of beef, the timber etc overseas.

Thanks for any explanation.

Regards,

Peter

A: Cheers, Peter.

The price of butter certainly continues to grate with many people, despite my best efforts to explain the ups and downs of international pricing.

Intuitively, it does seem strange that people on the other side of the world can be paying the same price as we do for a product made just down the road.

But I was surprised by your assumption that transportation accounts for 40% of butter costs.

Basically, by the time you stack a few tonnes on a truck, or many more tonnes on a boat, the transport cost per unit is actually very low.

I double-checked this with Fonterra. It confirmed that domestic transport costs are about 1% and international costs are about 3% of the final price.

So the transportation costs are marginal and don’t have a big impact on the retail pricing.

If New Zealand butter is cheaper in international supermarkets than local supermarkets, I’d be looking at the margins being added by the retailer.

Ultimately, as I pointed out in a previous column, if we want a product such as butter to be cheaper than the market price then it has to be subsidised by someone.

I don’t think the Government should be forcing farmers (or any other businesspeople) to charge lower prices than they can get elsewhere.

The Government could subsidise the price, of course. But they’d be doing that with taxpayer money. And it raises questions like: why butter?

The Greens and Labour occasionally talk about removing GST from some food products, which would be a form of subsidy. But the focus there tends to be healthy fresh produce, which they believe we all need to eat more of.

Products such as cheese and butter seem to hold special cultural importance to many Kiwis, given our history as a dairy-producing nation.

Perhaps a political party could run on a policy of subsidising them specifically; it might prove popular!

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 his 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.