We’re Twiddling Our Thumbs, Waiting For Deals To Be Done. Right Now, We’re Only Getting Crumbs

• Progress on tariff de-escalation is still ongoing, though it seems we’re getting closer to negotiations beginning between China and the US. In the meantime, we’re unfortunately watching tariff damage feed through across a number of high-frequency data points.
• Amid tariff turmoil, US regional manufacturing surveys have shown significant drops in activity, with even worse expectations for the next six months. See our COTW for more.
• Locally, the focus is on labour market data – out Wednesday. By our calculations, the unemployment rate is expected to climb to 5.3% - the highest since 2016.

Here’s our take on current events

We’re still twiddling our thumbs for trade deal announcements. But at the very least there were some positive developments over the last week. For starters, President Trump signed an executive order aimed at easing the impact of the 25% tariff on US auto imports. The tariff itself came into effect on Saturday, but the new order allows domestic car manufacturers to receive partial reimbursements for imported car parts. Trade tensions between the US and China also appear to be easing. Trump has shown willingness to lower levies on China “at some point”. On the other side of the table, China has said it is “evaluating” offers from the US to engage in trade negotiations. Although, reports have emerged that China has exempted around a quarter of US imports from the 125% tariff. A list of 131 US-made products reportedly eligible for exemption has been circulating among businesses over the past week. And though the list has not been officially confirmed, a number of companies in China have reported bringing in goods from the list without paying tariffs. China is far less reliant on US imports than the US on Chinese imports. Nonetheless, China’s quiet moves in the background suggest that they’re likely trying to mitigate trade war damage to their economy by avoiding a collapse in key imports. All in all, trade talks are still ongoing, but recent developments lean positive and progressive.

Globally, the impact of the tariffs is already coming through as high frequency data rolls in. In the US, the goods trade deficit widened from $147.9bn to $162bn in March with a surge in imports before tariffs were implemented. And the rush to bring in imports was largely responsible for US economy contracting an annualised 0.3% in the March quarter, the first fall in GDP since 2022. Looking ahead, activity likely slowed in April. Several US regional manufacturing surveys posted sharp drops in activity last month, alongside deteriorating expectations for the next six months (see the COTW for more).

Away from the US, China’s, manufacturing PMI also dropped to 49 over April - its lowest reading in 16 months. And the new export orders measure fell to the lowest since late 2022. While here at home, tariffs are also clouding the outlook for local businesses. The tariff trade war is weighing on business confidence and business’ plans to invest. The Kiwi economy was on the road to recovery pre-tariffs. But heightened global uncertainty threatens the path ahead with some firms likely needing to shelve their investment and employment plans.

Tariff news will continue to dominate headlines in the near-term. But locally, we’re waiting for the latest labour market data, out on Wednesday. The economy may have just started to turn, with output expanding at the end of last year. But the labour market lags the broader economic cycle and the appetite for labour remains soft. Jobs growth looks to have picked up the pace at the beginning of the year, but still not fast enough to outrun population growth. The labour market is struggling to absorb the added capacity. And so, by our calculations, the unemployment rate is set to hit the highest level since December 2016, rising from 5.1% to 5.3%.

Stats NZ’s monthly jobs data notched a 0.2% gain over the March quarter. It follows the steep decline in filled jobs over the middle of 2024, including eight months of a decline in the number of jobs. The low base is underscored by the weak annual rate, with March employment 1.5% below last year’s levels. There is a conceptual difference between Stats NZ’s filled jobs data and the Household Labour Force Survey (released on Wednesday). The former is drawn from tax data, and the latter is subject to sampling errors. Despite this, the monthly data does a good job in providing a steer on employment. Accordingly, we have pencilled in a modest 0.1% quarterly lift in employment following two straight quarters of a decline.

Growing slack within the labour market should also see wage growth continue to moderate. The private sector Labour Cost Index (LCI) hit a series high of 4.5% in early 2023, as rising inflation expectations and labour shortages 
bolstered wage demands. But balance of power has shifted back to the employers. We expect to see a 0.6% quarterly rise in wages, pulling down the annual rate from 2.9% to 2.7%.

The jobs data is a key statistic before the May MPS. Our forecasts are slightly softer than the RBNZ’s latest projections. The RBNZ sees the unemployment rate lifting to 5.2%, which they forecast to be the peak in the current cycle. However, given the weakening global growth outlook, there’s risk the recovery in labour demand is delayed.

Charts of the Week: US activity expectations fall off a cliff.

Forecasts for growth are being slashed left, right, and centre as tariff turmoil takes it’s toll. Damage has been done and there’s more to come. Across the US, several regional business manufacturing surveys saw sharp declines in activity over April. Most notably, Philadelphia’s general business activity index dropped nearly 40 points over the month. Meanwhile, the Dallas Fed’s measure fell 20 points to -35.8, it’s lowest reading since May 2020.

What’s even worse is the downturn in expected activity. The Richmond Fed’s future activity index tumbled to -37, marking the lowest reading since the series began (though it must be noted that the series began in 2010, and omits a little event called the Global Financial Crisis). And the New York Fed’s expectations index slipped to -7.4, falling deeper than levels seen during the GFC when the trough hit -5.1.

As a leading indicator of economic output, the sharp decline in expected business activity is a worrying sign of what may lie ahead. Especially on the heels of the US economy recording its first quarterly contraction in GDP since the start of 2022. The deterioration in confidence around future demand is likely to be met with greater pullback from firms. Expansion efforts and investment plans may be shelved. Hiring too may slow. All of which risks a further slowdown of the US economy.

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