Photo: AFP / Timothy A. Clary
The BNZ's chief economist talks us through the global economic levers being pulled right now, and offers hope for getting through relatively unscathed.
After weeks of turmoil in the global markets, economists and commentators have used words like 'bloodbath' and 'carnage' to describe the world's financial situation.
And while New Zealand often feels relatively cushioned, what happens in the US is inextricably linked to the rest of the world.
"It will impact us to some extent, there's no doubt," says BNZ chief economist Mike Jones.
"We don't trade with the US as much as some other countries, but it's 25 percent of the global economy. It's a huge part of global activity, so if the US is slowing down or entering recession, the impacts will be relatively widespread."
In today's episode of The Detail, Jones explains how trade wars, tariffs and plummeting confidence create economic downturns, and whether New Zealand is bound for recession.
While there is no official definition of a recession, it is generally agreed that it is "two consecutive quarters of declining growth", as defined by a US economist in 1974. More simply, Jones says it is "basically a prolonged period of weak economic conditions".
And that is part of why this recent turmoil has been so scary for many.
"If you take stock of where we are now as an economy, we're barely out of recession, we've only had one quarter of positive growth after two years of not a lot of growth at all, and many of the impacts of last year's recession are still with us - things like rising unemployment, rising business insolvencies, some financial stress in some areas," he says.
"That leaves us a little bit vulnerable."
Trump's tariffs have played a huge role in the economic panic. He initially announced huge tariffs on 2 April, which he dubbed 'Liberation Day,' but the situation quickly escalated when China retaliated. The tariff on Chinese goods to the US currently sits at 145 percent, though Trump has said they will not remain that high.
Jones says there are two major ways in which tariffs and the threat of a trade war hit the economy.
"The first is via trade and exports. We are an exporting country, we rely on the global economy I suppose as our 'shop floor' where we sell our wares as a nation... so as a result of this trade shock, if we see growth in our trading partners, and China in particular, slow dramatically, maybe they're less inclined to buy our exports, or maybe they buy it at a lower price or not at all.
"The second would be via a hit to confidence. So an example of that would be consumers reading the news, getting concerned about the economy, maybe checking their KiwiSaver balance, getting a bit of a fright - all the things that might cause people just to hold back on spending or hit pause.
"And for businesses, it's probably similar. Do firms pause expansion plans, or CapX plans, or employment plans until the dust starts to settle a little bit? And the real killer there is, I think at the moment, the uncertainty... when firms are uncertain about the outlook they tend to sit on their hands, they do nothing, and doing nothing of course is in and of itself negative for economic activity."
In the past few weeks, major US banks have predicted the likelihood of a recession there is between 45 and 60 percent - even after Trump hit pause on the tariffs for 90 days.
"I think it is relatively clear the US economy is going to take a hit and the odds of recession have gone up a lot," says Jones.
"There are things in train now that are pretty difficult to unwind... particularly the corrosive impact of that uncertainty that we've seen to date.
"There is already activity in the US that's been cancelled as a result of this flip-flopping on tariffs. There's also probably the question of 'well, even if we saw some rowing back, or further rowing back of some announcements, what's to say that might not change in future?'."
For New Zealand, his prediction is only slightly more positive.
"I don't think at this stage that we're necessarily destined for recession.
"I think that the scary bit is that we're seeing this big global shock play out on our screens and in the media on a daily or intra-daily basis, which has the potential certainly to knock some of the growth potential from New Zealand's economy. I think the question is not so much does that big trade shock immediately push us back into recession, it's more does it kind of take the top off the recovery just when things were starting to get going again.
"If the US is slowing down or entering recession, the impacts will be relatively widespread. Probably more relevant for us now is China though - China takes about 25 percent of our exports as opposed to 13 percent that go to the US, so I think a significant turn down in Chinese economic growth would make things particularly difficult for New Zealand."
There are some levers that the government and Reserve Bank can use, though Jones says they are 'cushions', and not 'fix-alls'.
One of those is by dropping the official cash rate, which the Reserve Bank has recently done, and which banks predict will fall further.
"For the government, there's what economists would call 'automatic stabilisers'. The idea is that if an economy turns down, the government tends to take in less tax as incomes and profits come down, and tends to pay out a little bit more in benefits for unemployment and things like that.
"You've also got, in the back room somewhere, the full-blown crisis stuff.
"That's things like, as we saw in Covid, central banks printing money (or quantitative easing), lending directly to banks, committing to keep interest rates low for a long period of time and on the government side, very direct fiscal support, you know, pushing money out into the economy very quickly."
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