The global trade war may pose less of a threat to the New Zealand economy than businesses and households expect

Ahead of the 2022 Christmas holidays, then-Reserve Bank Governor Adrian Orr famously told New Zealanders to “cool their jets” and rein in spending.

The economy was overheating, and the central bank was preparing to douse it with cold water.

Today, the opposite message may be needed. Acting Governor Christian Hawkesby could open his August press conference with: “Ladies and gentlemen, start your engines.”

Or he might channel Franklin Roosevelt: “The only thing to fear is fear itself.”

Interest rates are now neutral, core inflation continues to cool, and the global trade war poses little threat to the New Zealand economy. Things are mostly fine.

Sure, John Key wants interest rates even lower, headline inflation just hit a 12-month high, and tariffs are making daily headlines — but much of this is noise.

RBNZ chief economist Paul Conway used his speech on Thursday to gently tell businesses and households it might be time to get on with hiring, spending, and investing anyway.

He argued New Zealand would feel the global slowdown, but the impact would be modest compared to the Global Financial Crisis.

Still, high uncertainty has put firms and households into “wait-and-see mode”, slowing economic activity more than tariffs could directly.

“These reactions to uncertainty are entirely logical at the individual level. But they do risk becoming self-reinforcing, with negative effects on aggregate demand in the economy. In fact, uncertainty can end up being more negative for the economy than the thing we are uncertain about in the first place,” he said.

The ‘freak-out’ channel  

In February, Business Insider declared 2025 the “era of scaredy-cat capitalism”, accusing American businesses of becoming timid and slow, passively hoping uncertainty would resolve itself.

Austan Goolsbee, chair of the Chicago Federal Reserve, recently said tariffs should directly affect only the 11% of the US economy tied to imported goods.

“So, there is a sense in which the US is overwhelmingly a domestically-driven economy and even substantial tariffs might not have that material and impact on the aggregate in the US,” he told The Wall Street Journal.

But there were ways for tariffs to “jump out” of that limited lane. Retaliation from trading partners could suppress exports and tariffs on input costs could affect domestic production and prices. 

“And then [number] three, the most important, if people start freaking out—businesses and/or consumers—and change their behaviour, then the impact of tariffs can be a lot larger than just the 11% lane,” Goolsbee said.

In another interview, he called this anxiety the “freak-out channel” and said it was one of the things that keeps him up at night.

Conway’s speech outlined a similar situation for New Zealand. Tariffs may dent export revenue, but exports only make up a small share of the economy anyway. 

The exports share of GDP has been falling for decades, and includes tourism services which can't be tariffed.

Despite their small size, exports play a key role in the New Zealand economy and the United States is its second-largest customer. Still, Americans buy less than 10% of New Zealand’s total goods exports.

Red meat is the largest export to the US, and that industry isn’t worried. Prices often fluctuate that much due to exchange rates, seasonality, and other factors. What does worry the sector is maintaining enough supply to meet global demand.

Nearly a third of all New Zealand exports are dairy products. Just glance at your local butter price to see how that market is faring amid the tariff uncertainty. The US buys hardly any from us anyway.

Winemakers seem more affected than their farming neighbours. Top wine exporter Delegat told Farmers Weekly the 10% tariff would lift its US$15 bottles to about US$16.50 on store shelves.

The company cut its global case sales forecast by 5% in April, with just three months left in the fiscal year. Its profit forecast was trimmed from a midpoint of $57.5 million to $48.5 million.

New Zealand exports rose 10% year-on-year in June to $6.6 billion, but those to the US fell 8.8% to $753 million. Monthly meat exports had exceeded $1 billion for four straight months but slipped to $814 million in June.

Winning the trade war

While official assessments of the trade war generally paint a negative picture for New Zealand, their authors and readers often admit privately that the country could benefit overall.

Paul Conway raised this possibility in his speech on Thursday. He noted, for example, that Kiwis could see cheaper imports if the US starts buying less on the global market.

“We could benefit on the export side too, such as US buyers buying more of our tech, given tariffs on similar products out of China. Or US buyers buying more of our meat if the recently announced tariff of 50 percent on imports from Brazil into the US is implemented,” he said.

In my view, businesses and households should consider whether their own economic prospects are highly uncertain or if they’re simply caught up in general anxiety. Many of the trade and economic uncertainty measures—currently off the charts—are based on news coverage and risk creating a feedback loop.

Conway wasn’t being quite as optimistic as that. He said economic uncertainty had been rising since the early 2000s and showed no clear signs of settling any time soon.

“This is a challenging time for the global economy. Tariffs are rising, long-standing trading relationships are being reshaped, and geopolitical risk is highly elevated. These are deep and structural shifts taking place in the global economy, not short-term noise. They will affect us here in Aotearoa.”

There would be a “sigh of relief” if US tariffs stopped shifting weekly, but businesses shouldn’t delay investment and expansion plans indefinitely.

“I do think there will come a point where we just have to get on with it, even through global uncertainty, even if it remains elevated,” the chief economist said.

Fire up those jets, scaredy-cats. It’s time to get out of recession.