Trump Volatility Hangs In The Air, While The Kiwi Economy Is In Repair

• Financial markets were less volatile than expected during the first week of Trump 2.0. Trump was sworn in, and several executive orders signed. No action however was taken on the tariff front...yet.
• Here at home, the Kiwi economy is in an awkward phase. Confidence has improved, but activity is still depressed. Many businesses have survived into 2025, but it will take more for us to thrive.
• Still, things are falling into place for a better year. Kiwi inflation held steady at 2.2%, and measures of core inflation are trending down. The RBNZ has the green light to relax policy further.

Here’s our take on current events

In a week which had potential for cataclysmic market volatility, the outcome was rather muted. Indeed, Trump’s inauguration made headlines near and far. But the overall market reaction was tamer than anticipated. Largely because of the absence, or rather delay, of tariffs. Yes, the discourse for Trump’s tariffs remains alive and well. And several countries, from China to Colombia, are on his radar. But he hasn’t pulled the trigger yet, and even watered down his plans. Good news for us, Trump has gone from considering a 10% tariff on China to saying he’d “rather not” have to use tariffs on China. Of course, uncertainty remains with negotiations and threats hanging in the air. Markets survived week 1 of Trump 2.0 relatively unscathed. But we’re still in a period of noise and volatility as he settles back into the Oval Office.

Moving our thoughts to home, we’re thinking about the current state of the Kiwi economy in three periods (or phases). The first period was the recession, that started in 2022 and snowballed into 2024. The recession was much deeper than most had forecast (especially the RBNZ). And we believe the recession ended in the last months of 2024. So here we are, entering the most difficult phase, or period. With most businesses able to “survive into ‘25”, we’re expecting an uplift in mindset. Confidence has improved, but activity is still depressed. This current phase is most important. The battered economy needs to rebalance… we need to redefine risk, and we need to reengineer our growth aspirations. Falling interest rates and a steady uplift in forecast activity should become self-fulfilling. We think the rebalancing will take 6 months (plus). But that leads us to the “thrive in ‘25” phase. We’re all hanging out for this. Growth should accelerate over the second half of 2025 as the full force of lower interest rates, plus an expected uplift in global growth, feed through. The key metrics for this year are coming from the NZIER’s survey of business opinion. We’re watching businesses’ intentions to invest and hire. If we get more activity, with stable inflation, profitability will improve, and businesses will start to invest again. And that’s real growth. That’s the good stuff. That’s what we’re looking for. (Read here for more on our 2025 outlook: https://www.kiwibank.co.nz/business-banking/thrive-hq/kiwi-economics/commentary-insights/pick-a-path-alive-in-25-or-thrive-in-25-heres-our-outlook-for-2025-and-beyond/)

And we’ve already got part of the equation solved. Inflation is stabilising. Over the December quarter, consumer prices rose 0.5%, leaving the annual rate unchanged at 2.2%. With each release, we grow in confidence that inflation is becoming well contained. It took some time (2½ years), but the beast is finally back in its cave. (See our full review here: https://www.kiwibank.co.nz/business-banking/thrive-hq/kiwi-economics/commentary-insights/2-so-close-you-can-almost-taste-it/).

Deflation pressures are becoming more broad-based. There were more goods and services recording a decline in price over the quarter. 251 items in (or almost 40% of) the CPI basket recorded price decreases – the most since 2020, or 2017 excluding covid. At the same time, there were fewer goods and services recording price hikes. In fact, for the first time since the end of 2020, just under half of the basket recorded a price increase. And in even better news – the underlying trend in consumer prices continues to cool. The various measures of core inflation confirmed as much. Stripping out the volatile price movements in food and fuel, annual core inflation is down to 3% from 3.1%

Looking at the CPI report card, there's enough disinflation in the data to support further rate cuts from the RBNZ. And a 50bp cut to 3.75% in February is pretty much a done deal. We'll then see, most likely, another cut to 3.5% in April (or May). It's the next move(s) below 3.5% that's in question. The RBNZ is signalling a pause at 3.5%... a long pause... We believe more needs to be done to stimulate the recovery into 2026 and beyond. We believe the inflation problem is no more. We believe households and businesses need rate relief. And we believe the RBNZ will be forced (once again) to deliver more, not less.

Chart of the Week: Getting there

Headline inflation is holding steady at 2.2%. And it’s the rapid deceleration in imported prices that has done most of the work in wrangling inflation back within the RBNZ’s target band. Despite a slight rebound over the December quarter, over 70% of the move in headline inflation from the 7.3% peak to 2.2% is thanks to the fall in tradables. Imported prices peaked at a whopping 8.7%yoy and have fallen swiftly to -1.1% with the decline in global inflation rates. Momentum, however, can be easily disrupted. And the recent depreciation in the Kiwi dollar is a lurking threat. The Kiwi dollar began 2025 on the backfoot, falling to the lowest level since 2022. The fall in the Kiwi currency is a double-edged sword. On the one side, our exports become cheaper to foreigners, as New Zealand goes on sale. That's good for goods demand, and tourism. It provides an income boost for exporters who are paid in dollars and convert back to Kiwi. Think farmers and growers. But our purchasing power declines on the other side. Imports become more expensive... including petrol.

Today’s inflation is all homegrown. Domestic inflation is the stickier, more persistent kind of inflation. Nontradables peaked at 6.8%. Although it is slower to turn, the good news is that it has and is now moving in the right direction (south). At 4.5% nontradables is pulling further and further away from the peak. That said, domestic inflation is still sitting high above where it needs to be (~3%) to see overall inflation anchored at the RBNZ’s 2% target. There are still some frustrating pain points, particularly around council rates and insurance costs still running hot. Nonetheless, we see more disinflationary pressure in the pipeline as the Kiwi economy continues to operate below its productive capacity. A further loosening of the labour market should also keep downward pressure on domestic prices.

Special Topic: Waiting on the market to change.

REINZ data for December showed another small uptick (0.2%) in house prices over the month. However, prices are still down around 1% compared to last year. And it was a very slow month – even after accounting for the usual end-of-year slowdown. Monthly sales were down 9%. And the seasonally adjusted median days to sell jumped up to the highest it’s been in nearly two years (50 days, up from 47). Certainly not helped by the largest slump in new listings for any December month in the past 17 years. It seems sellers are staying cautious and holding off for bigger gains to be made. And fair enough. For now, things are still sluggish on the ground. But we’re hopeful for housing this year as lower interest rates spark life back into the market. Our view - we expect to see house price growth of about 6% this year.

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