Trumpian Tariffs And Tough Talk Generate Geopolitical Jitters

• February was a volatile month in markets. Confusion around US trade policy and fears of geopolitical tensions spurred a flight to safety.
• Timely indicators are showing slight signs of improvement. We are nearing a turning point in the economic cycle. But the recovery is not guaranteed. Given global uncertainty, downside risks dominate.
• Our COTW takes a look at the latest retail sales numbers for the end of 2024. An increase in discretionary spend over the quarter saw retail sales up 0.9%, while weaker spending earlier in the year saw sales remain relatively flat over the year.

Here’s our take on current events

Trump: The Sequel is unfolding like a thriller film, complete with twists and turns. And last week proved Trump’s announcements hold a shelf life of mere hours. On Thursday morning, news broke that the start date of the 25% Mexico and Canada tariffs was pushed out to April 2 from March 4 (after being delayed from the original Feb 1 start date). Then Friday morning, we woke to news that Trump will in fact go ahead with the March 4 start date. An additional 10% tariff on Chinese imports was also announced. And in targeting trading partners with which the US holds a trade deficit, European imports will be slapped with a 25% tariff. Confusion and uncertainty however don’t go down well in financial markets. Add to that elevated geopolitical tensions following a fiery clash between Trump and Ukraine President Zelenskyy in the Oval Office. Equity markets were rocky and safe haven flows saw the USD strengthen and the 10-year US Treasury yield fall. It’s still anyone’s guess whether tariffs will be implemented this week. February was a volatile month. And this month will be no different. Trump could give ‘March madness’ a whole new meaning.

Here at home, it was a relatively quiet week on the data front in terms of major releases. That said, we did get a number of positive high frequency data points and partial GDP indicators. Monthly business and consumer confidence numbers were both up and showed signs of stabilising at higher levels over February.

Meanwhile, Stats NZ’s monthly job indicator showed a 0.3% increase in filled jobs over January. It’s a decent lift, though it should be noted that the first outturn is often revised. Filled jobs for December were revised from a 0.1% gain to a 0.1% decline. At the industry level, it’s still a mixed read. As in previous months, there were gains in industries related to tourism including hospitality and recreational services. But job cuts continued in industries like construction given a quiet pipeline. Encouragingly, there was a slight uptick in employment within the retail sector. That’s consistent with recent signs of improvement in household consumption. Retail spend rose 0.9% in the December quarter, up from flat in Q3 and with a notable increase in discretionary spending (see our ‘Chart of the Week’ for more).

Overall, the turn in data provides growing evidence that the Kiwi economy is on track for a recovery in 2025. With rate relief underway we’re slowly making progress. However, it’s still not until the second half of the year that we expect the recovery to really gain momentum. But the turn in data is a start. And with more rate relief to come, the light at the end of the tunnel is burning brighter. At 3.75% the cash rate remains well above estimates of neutral - which are close to 3%. So, interest rates are still at levels restraining demand. Thankfully, the RBNZ have signalled further cuts. Most economists are aligned in the view that the cash rate will fall a further 75bps to 3%. And while the positive turn in data now has seemed to fuel some discussion on whether the RBNZ get to 3%, we think the risks remain to the downside. With everything that is happening offshore, from Trump tariffs and trade wars to geoeconomic fragmentation, the RBNZ may find themselves having to stimulate the economy.

Chart of the Week: A cautious comeback for consumer spending.

Retail sales data from Stats NZ last week showed spending ramped up towards the end of last year. Over the December quarter, retail sales were up 0.9%. Meanwhile, over the year retail sales were up just 0.3%, reflecting the softness in sales earlier in the year. The good news, was the notable increase in spending on discretionary spending. Spend on durables, from furniture to electronics, was up between 4-5% respectively over the quarter. Meanwhile spending in accommodation and recreational goods posted sizeable increases of 7.6% and 5.8%. Such moves point to a recovery in consumer appetite helped by the lower interest rates and stable inflation. Looking into 2025, the outlook is for a continued improvement in consumer appetite. Our own Kiwibank transactional data has already shown as much going into 2025. Spending over the summer was 2.3% greater than the 2024 monthly average. But the typical spending spike was far more muted than previous years. Check out our spending tracker Summer of cautious indulgence for more.

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