Unpredictability and confusion continue to be the central themes across markets and global economies. Escalating tariff threats and the erratic back-and-forth nature of their implementation have caused a significant shift in the economic discourse. What was once a focus on the risks of a higher inflationary environment is now increasingly dominated by growing concerns over a potential U.S. recession. The jury of the full impact of Trump’s trade policies is still out. And as such, it’s a very challenging time for central banks.

This week, we’ll see rate decisions from the Bank of England, Bank of Japan, and of course the US Federal Reserve. All three central banks are widely expected to keep rates on hold. However, there will be significant interest in each bank’s assessment of the risks of Trump’s policies on their own economies and the broader global economy. The Fed meeting on Thursday, in particular, will be closely watched for any insights into their stance on these evolving risks.

Thursday will also be the day we see how the Kiwi economy ended 2024. And by our estimates, it’s looking like the economy will have taken its first step in its recovery. We expect activity across the Kiwi economy lifted 0.3% over Q4 – in line with the Reserve Bank’s forecast.

It's certainly an improvement from the prior two quarter’s hefty declines in activity of around 1%. But after such a fall, the rebound is rather muted and reflects the ongoing weakness in the economy. We expect the economy is still 1.4% smaller than it was in December 2023. But we’re acknowledging this as the first step in the economy’s recovery. We’ve had 175 bps of rate cuts since August last year. And more rate relief is on its way. With each cut, the restrictiveness of the current environment eases. And over time, we expect this to translate into stronger economic activity.

We’re already seeing some green shoots. December’s 0.3% expansion in activity is likely to be driven by an increase across retailing and accommodation. As well as a sizable pick up across the transport group. And a rebound in the utilities space from last quarters chunky decline will also help. That said, the scorecard is still quite mixed with a number of industries still doing it tough. Construction continues to be a weak point in the economy off the back of still high building costs and a sluggish housing market. While business services have also lost their lustre in the face of waning demand.

It should be noted that there continues to be a great degree of uncertainty around New Zealand’s GDP numbers. Since COVID, the sharp fluctuations in activity during lockdowns, coupled with the temporary loss of tourism – a highly seasonal sector – have made it difficult to pinpoint the seasonal components of the data. As a result, revisions to historical prints have been common with each new release. And there is a strong chance that Q4’s numbers may be revised (in either direction) in future updates. Stats NZ recently introduced a new method for seasonally adjusting the data, but whether the new method will prove effective is yet to be seen. We anticipate that there will still be a period of adjustments and refinements ahead. And as such, still expect to see a degree of volatility in the numbers.

It's these revisions and volatility in the GDP numbers that have seen the Reserve Bank pivot away from its focus on GDP to higher frequency data. Given that GDP data is inherently a lagging indicator, we would argue that higher-frequency data has always been more valuable for a more timely understanding of the economy. As a result, GDP numbers at current may very well carry less weight in shaping the RBNZ’s perspective. And besides, it’s always the outlook which matters most.

And the outlook is improving. For now, with the cash rate still above neutral, demand and economic activity will remain slightly constrained in the near term. But looking ahead, as we move closer to a neutral rate environment, we anticipate momentum to grow. That said, growing downside risks to the global outlook do pose a potential headwind for the Kiwi economy’s recovery. And should the downside risks persist, then a move to a cash rate below 3% may be needed to get us back on track.

Financial Markets

The comments below were provided by Kiwibank traders. Trader comments may not reflect the view of the research team.

In rates, Kiwi yields bounce around their recent ranges

“Kiwi rates are bouncing around the bottom of recent ranges remaining subject to flows from both sides on any given day. The benchmark 2 year respecting the recent 3.40-3.60% range. The longer end of the curve remains hitched to offshore direction, which is largely reactive to tariff news. The spread between NZ 2y and 10y did widen to cycle highs of +75.5bp during the week when 2yr touched below 3.40%, clearly no real anticipation of rate hikes just yet. In saying that, OIS curves continue to price a good chance of a +25bp hike by late 2026. That chance more reflective of the strain in 1y1y pricing due to mortgage paying in the 2 year, although improving higher frequency data also playing a part.

The Bank of Canada cut rates again last week, noting the obvious that they can’t lean against weaker growth and higher inflation simultaneously. They felt alert to the downside risks forming but needed to see second round effects of the tariffs before reacting. That sentiment will no doubt be echoed in other central bank rhetoric. The US market has -65bp of cuts priced this year, with nothing priced for Wednesday’s meeting. The bias is for a dovish tilt even though the FED has repeatedly said they are on hold until the net effect of policy government change is known

This week NZ GDP will hold the markets limited focus. A wide spread of commentator’s forecasts clustered around the RBNZ +0.3% forecast. The outcome should have limited market reaction unless it is wildly different given how prone the incredibly lagged number is to revision. In this environment expect yields to remain suppressed, and the longer the tariff war goes on the more likely downside risks become reality.” Ross Weston, Head of Balance Sheet – Treasury

In currencies, tariffs and geopolitics continue to drive currency markets

“Last week, global markets continued around the theme of uncertainty, with traders globally looking to ‘de-risk’ their portfolios and find safe haven assets. In this environment the Kiwi dollar is continuing to perform relatively well, helped along by some reduced popularity in the US dollar. The US dollar was unfavoured despite being a traditional safe haven, with the Euro extending gains on the back of expected defence and infrastructure spending. Last week the Kiwi traded in a relatively tight range of 0.5684- 0.5754, mostly at the top end of said range. Market jitters from potential tariff ramifications saw it dip into the lower end of the range, albeit not for long. The Kiwi is largely supported around the 0.5700 level. Our view is that the Kiwi will continue to be range bound in the 0.5550-0.5750 for now, but we are cautiously optimistic that having this solid support at 0.5700 that we may be in extending the range up to 0.5800/0.5850 in the short term. The week ahead has our Q4 GDP print, but it is unlikely to provide direction for the currency in the current environment, in part due to it being very much a lagging data point. It may however indicate that the green shoots we are seeing are solid ones, with our Economists picking that we saw growth of +0.3% in the final quarter of 2024. Otherwise markets will remain enthralled by the various levels of uncertainty that continues to be unabated. There is reportedly a meeting later this week, between Putin and Trump scheduled to discuss the Ukraine. We also have 3 central bank decisions with the Fed, BoJ and BoE. All are expected to remain on hold this week, but the Fed ‘dot plot’ updated will be keenly watched, as will comments from BoE and BoJ around their outlooks in the current uncertain climate.” Mieneke Perniskie, Trader - Financial Markets.