Rising global instability casts a shadow on Kiwi growth
New Zealand’s economic recovery is facing renewed headwinds as the escalating global trade war, driven by US tariff hikes and ongoing uncertainty, threatens to derail growth forecasts.
Kiwibank economists Jarrod Kerr (pictured left), Mary Jo Vergara, and Sabrina Delgado warned that “the longer negotiations take, the greater the damage to global growth, which is already feeding through now.”
The IMF recently slashed global growth forecasts to 2.8% for 2025, with key trading partners the US and China seeing sharp downgrades.
New Zealand is expected to feel the brunt of this slowdown, given its heavy reliance on exports to these economies. A downgrade to Kiwi growth now appears inevitable when the IMF releases updated figures later in May.
Trade war uncertainty hurting business sentiment
ASB’s Nick Tuffley (pictured right) noted the “continued inconsistencies, backflips, and Olympian gymnastics moves” coming out of Washington have heightened global economic uncertainty, weighing on business confidence.
Locally, traders at Kiwibank observed that “uncertainty is likely to remain, keeping front-end yields pinned,” with the market now pricing the OCR to fall to around 2.7% by the end of 2025.
“The risk is that a wider range of businesses defer decisions amidst general uncertainties,” Tuffley said.
ANZ’s upcoming Business Outlook survey will offer a critical barometer of how resilient New Zealand businesses remain in the face of global volatility.
Currency volatility reflects shifting sentiment
The Kiwi dollar briefly rallied to a post-US election high of 0.6029 but has since retraced as markets digest mixed signals on US-China trade negotiations.
Kiwibank’s Hamish Wilkinson said the NZD remains vulnerable, noting that “investors are unlikely to adopt overly long Kiwi positions in the near term” as rate differentials favour the US and global growth concerns persist.
Inflation pressures keep RBNZ cautious
While New Zealand’s consumer confidence has rebounded, Kiwibank and ASB analysts flagged risks around rising inflation expectations.
“The RBNZ’s tolerance to ‘look through’ temporary inflation impacts will be constrained if inflation expectations lift and engrain,” ASB’s Mark Smith said.
As a result, while markets expect 75 basis points of rate cuts by the RBNZ by year-end, the central bank will tread carefully.
Domestic data remains resilient for now
Despite the global jitters, New Zealand’s domestic economy has held up relatively well so far.
Labour market conditions remain soft but stable, and the upcoming pre-budget speech by Finance Minister Nicola Willis is expected to reaffirm the government’s commitment to tight fiscal settings.
However, Tuffley noted “the possibility of a pivot towards growth-friendly policies, such as corporate income tax cuts, could nudge NZ yields higher.”
Outlook: Brace for volatility
In the short term, Kiwibank expects New Zealand’s short-term rates to ease alongside further RBNZ cuts. However, “bouts of volatility are expected throughout 2025” as global trade tensions persist.
More Chinese stimulus and fiscal support measures globally are likely to be needed to cushion the impact, but uncertainty will continue to cast a long shadow over New Zealand’s economic prospects.
The clear message from analysts: New Zealand’s economy remains vulnerable to global forces beyond its control, and the road to recovery could be rockier than initially hoped.
