It’s Mayhem, It's Messy And It’s Melodramatic

We’re still sitting, waiting, wishing for tariff de-escalation. Trade talks remain underway between several countries and the US… and we’re waiting for announcements. And no one knows if the US trade talks with China have started. Trump says they have. China says they haven’t.

• Timing is of the essence. The longer negotiations take, the longer the global economy remains in a heightened sense of insecurity. And the greater the damage to global growth. The IMF has already started slashing their forecasts for global growth. Talk is cheap, so far, but the economic costs are already mounting.
• The prospect of a global trade war will likely keep downward pressure on prices. Whether that’s a consequence of a slowdown in global economic growth or a diversion of trade marked at a discount. See our COTW for more.

Here’s our take on current events

Picking up from where we left off a fortnight ago, we noted the importance of the trade negotiations that were set to kick off under President Trump’s 90-day pause on reciprocal tariffs. Two weeks later, and we’re still waiting. Though we’re yet to hear of any official action, markets remain skittish on any tariff related news. Reports of Trump lowering the tariff set on Chinese imports from 145% to somewhere in the 50-65% range, provided some relief to market sentiment last week. But the outlook remains murky and confusing with a bit of “he-said-she-said” between China and the US. Trump has asserted and assured that trade talks with China have commenced, while officials in Beijing have claimed no negotiations are underway. Who’s to be believed? It’s anyone’s guess. So, we keep waiting. We’re waiting on talks that will lay the path for global growth from here.

Sideline jabs from Trump towards Fed Chair, J. Powell did cause some volatility. After calling Powell “Mr. Too Late” on rate cuts and branding him a “major loser,” U.S. equities and the Greenback slid amid concerns about the central bank’s independence and potential dismissal of Powell. And then Trump scaled back on the rhetoric, stating he had no plans to fire Powell. It’s mayhem, it's messy and it’s melodramatic. So, we move on.

For now, we’re still on the hinges between our upside and central scenarios. Though in reality, it’s simply timing that differentiates the two scenarios. Because damage already done through heightened uncertainty has already hurt the global economy and outlook. Our upside scenario is hopeful Trump will quickly close out “deals” for most countries lower than the initially stated reciprocal tariffs. But the longer negotiations take, the longer the global economy remains in a heightened sense of insecurity. And the greater the damage to global growth, which is already feeding through now.

The IMF last week slashed their global growth forecasts off the back of tariff turmoil and deteriorating sentiment. The IMF now sees global growth slowing to 2.8% in 2025, down from an earlier estimate of 3.3%. And while the downward revisions span across many countries, it’s advanced economies that are bearing the brunt of the downgrade. Unsurprisingly, the US saw the steepest cut to forecast growth, with a revision to 1.8% for 2025, down from 2.7%. And for 2026, US growth is expected to cool to 1.7%, revised down from 2.1%. On the other side of the trade war, China’s forecast growth was revised down 0.6%pts in 2025 to 4.0%, and another half a percentage point over 2026 to 4.0%. And it’s important to note that Chinese officials target 5%. So, they’re now falling short. More stimulus is now likely. The IMF’s forecasts for New Zealand’s growth rate is yet to be released with the full report out later in May, but with a slowdown across our two largest trading partners, a downgrade to kiwi growth is all but a given.

Charts of the Week: Downside risks to medium-term inflation grow.

Kiwi inflation accelerated at the beginning of the year. The annual headline rate lifted to 2.5% from 2.2%. The move in the headline rate is in the wrong direction. Tradable (imported) inflation continued to creep higher, moving from -1.1%yoy to 0.3%yoy. The lower Kiwi dollar no doubt had a hand in this. But there’s no need to panic at the monetary HQ. Inflation remains within the RBNZ’s 1-3% target band. And most importantly, the underlying trend in consumer prices continues to be one of cooling. Excluding the volatile movements in food and fuel, annual core inflation has fallen to 2.6% - the first time below 3% since March 2021.

The RBNZ would also take comfort in how domestic inflation is progressing. Annual non-tradables is peeling further away from the 6.8% peak, now sitting at 4%. Rental inflation was a key driver, but it’s strength is fading. For the first time since 2021, annual rent increased by less than 4% (at 3.7%). Home construction costs also continue to cool significantly, dropping to 1.9% - the lowest since September 2010. Also symptomatic of a weakening economy and labour market is the continued slowing in services inflation, from 4.8% to 4.2%. There are still some lingering frustrations, especially when it comes to council rates and insurance. Nonetheless, domestic price pressures, in aggregate, are cooling.

The prospect of a global trade war will likely keep downward pressure on prices. Whether that’s a consequence of a slowdown in global economic growth or a diversion of trade marked at a discount. Downside risks to medium-term inflation are growing. And so the case for more accommodative interest rate settings is strengthening. More is needed from the RBNZ to stimulate the recovery into 2026 and beyond. We believe households and businesses need rate relief. We expect the RBNZ to deliver another 100bps of rate cuts to a 2.5% cash rate by the end of the year.

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