The Roundup – March 2025
Economic Damage
February bore witness to the initiation of President Trump’s tariff attack, punishing America’s largest trading partners (China, Canada and Mexico) first, before unleashing substantial duties on the remainder of its trading counterparts in March and early April.
The direction, extent and velocity at which the tariffs were announced shocked markets, as both long standing allies and adversaries were subject to the trading penalties, going against convention and jeopardising decades-long mutually beneficial partnerships.
The sheer size of the levies which ranged from a minimum of 10% to 54%, went significantly beyond market expectations, while the speed at which these were administered and amended caused whiplash – a retaliatory spat saw China’s levy increased to 125%.
The enforcement and permanence of such policy and approach has the consequence of upending the international status quo by redrawing supply chains, forging new trade partnerships, and diverting goods once destined for the US to alternative markets.
The subsequent increase in the cost of everyday goods for the US consumer (the driving force behind the economy) will likely translate to curbed spending. This has revived fears of a recession, with the idea reinforced by some companies that are already feeling the effects.
The unpredictable nature of these trade developments, combined with the threat of a (US-led) global recession, has resulted in volatility spiking to levels last seen at the onset of the pandemic and GFC, and has been accompanied by an immense level of uncertainty.
Not surprisingly this backdrop has unnerved share markets with recent record highs being rapidly undone by a synchronised sell off, causing some markets to swiftly hit corrective territory (down 10% - 20%). However, equities were not the only markets to be impacted.
Periods of uncertainty tend to see a flight to less risky assets such as cash and bonds, gold and safe haven currencies. However, even the bond market got a bruising with investors concerned about a deterioration in market liquidity, resulting in a “dash to cash”.
As tariff plans proceeded, the USD sharply appreciated against an array of other currencies, including the AUD and the NZD, while gold rose as market participants looked for a refuge. Simultaneously, recessionary fears proved the catalysts for oil prices plummeting.
The movements seen in the markets recently are a direct result of the current (high) levels of volatility and uncertainty - not of any market dysfunction. As negotiations unfold and more clarity is gained around where trade policies settle, these levels will start to dissipate.
A New Governor in Town
Following the sudden departure of RBNZ Governor, Adrian Orr, at the beginning of March, Christian Hawksby (previously Deputy Governor) has been appointed as the Head of the Central Bank while the Board undertake a search for the top position.
In his first monetary policy review as Governor, Hawksby delivered on earlier guidance, honouring the 0.25% cut to the interest rate indicated at their February meeting. The latest cut brings the Official Cash Rate to 3.5%, marking 2% from its peak.
In the midst of such major global uncertainty (the impact on New Zealand is very unclear) this was perhaps the least unsettling trajectory. The additional rate cut will provide further relief to Kiwis and adds to the Bank’s position of flexibility.
This is especially critical, noting that while NZ was dealt the baseline tariff rate from the Trump Administration, with China (1st) and the US (2nd) as our largest trading partners, NZ is potentially poised to get caught up in a nasty trade war between the largest two economies.