It feels to me like the recovery is stalling, and we are at risk of falling back into a recessionary trap unless the RBNZ can inject some confidence.
We haven’t even experienced any direct fallout from the US tariff policy yet.
Unfortunately, regardless of how the final impact falls for New Zealand, the market slump and general chaos have already sown seeds of doubt about the economic outlook.
The timing couldn’t have been worse.
The RBNZ reserved judgment on the tariff fallout at its meeting on April 9, which was fair enough.
But it turns out that even before Liberation Day, the economic recovery was faltering.
Consumers put their wallets away in March.
Stats NZ card data for the month showed overall spending was down 0.8%.
That’s not the way a recovery is supposed to go.
As interest rates come down and the economy emerges from recession, consumers are supposed to feel more confident and start spending more.
The data showed spending on durables (things like household appliances) dropping by 2.5% month on month.
Hospitality spending was down by 1.1%.
This is worrying, given that the events of the past three weeks are likely to have dampened consumer confidence even further.
The gloomiest economists have argued for some time that the RBNZ will need to cut the Official Cash Rate (OCR) below 3% to stimulate the economy.
The consensus is growing.
On Wednesday, Sharon Zollner and the team at ANZ joined the chorus arguing that the OCR will need to go to 2.5%.
They also downgraded their forecasts for GDP and house prices.
What was striking about the downgrade was that it didn’t reflect any firm stance on the impact of the trade wars.
Like the RBNZ, ANZ says it is adopting a wait-and-see approach on that.
But Zollner makes the case that the global turmoil has already been enough to damage confidence and undermine the recovery.
Another gloomy report, from the team at Infometrics, did attempt to factor in the downside of the trade war on New Zealand’s economy.
That made for really grim reading.
“There had been hopes that the patchy recovery that had been occurring in the New Zealand economy in late 2024 and early 2025 would gain momentum and become more widespread as this year went on,” wrote Infometrics chief forecaster Gareth Kiernan.
“All bets are now off, given the chaos on international financial markets over the last few weeks, and a more robust recovery could now be as far away as 2027.”
The past few days have also seen international economists like S&P Global and Fitch Ratings make sizeable downgrades to their global growth outlook.
“World growth is projected to fall below 2% this year, which would be the weakest since 2009, excluding the pandemic,” Fitch said.
Fitch is picking China’s growth to fall below 4% this year and next, with eurozone growth stuck well below 1%.
On that basis, the rate path outlined by the RBNZ in February looks like it’s toast.
That path saw the bank pausing at 3.25% after a 25-basis-point cut in May and pondering if one more of the same size was needed later in the year.
Inflation hawks will note that the annual rise in the Consumers Price Index (CPI) came in at 2.5% in the March quarter – up from 2.2% the previous quarter and ahead of most economists’ expectations.
But the rise was largely driven by a spike in highly volatile tradeable inflation – things like food prices.
In the engine room of the economy, the non-tradeable inflation that bothers the RBNZ continues to fall.
Perversely, it is the slow rate of recovery for the New Zealand economy that gives economists confidence that inflation won’t become a problem again anytime soon.
It’s true that the cost of living and the cumulative effects of inflation are still causing economic pain.
But even for those who aren’t so greatly impacted by the high cost of living – professionals on good salaries, there is another issue: job insecurity.
Workers in their 40s and 50s, often heavily mortgaged, are nervous about the future.
Gains made on lower interest rates are being saved or used to pay down the mortgage more quickly.
The economy finds itself facing a Catch-22.
Consumer confidence and spending aren’t going to pick up until the job market stabilises.
The job market won’t pick up until consumers feel better and start spending.
We’re at risk of a return to a recessionary spiral – and we need a circuit-breaker.
Finance Minister Nicola Willis has made it clear that she has no plans to come to the rescue with a stimulatory Budget.
She is trying to stick to her fiscally cautious script.
We should hope that things don’t get so bad that she can no longer do that.
The good news is that the RBNZ has room to move.
And if the OCR is coming down to 2.5% then it makes sense to move more quickly to get it there.
We can’t afford to let this flickering ember of a recovery die.
A double cut, 50 basis points, is what’s required to get ahead of market expectations and give the economy a much-needed boost before what looks set to be (yet another) tough winter.
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.
