Not since 2020 and the early days of Covid has a Finance Minister summonsed journalists to their office for such a sober assessment of the dark economic clouds on New Zealand’s horizon.
Nicola Willis conceded that growth was likely to fall below current forecasts; that Budget “reprioritisations” would be needed to allow the Government to stick to its fiscal and debt targets and perhaps most worryingly of all that the impact on China would reverberate across Asia and therefore New Zealand.
It is early days as what is looking more and more like a crisis begins to unfold.
Willis’s briefing yesterday along with a prepared statement from the Prime Minister was obviously a move by the Government to get ahead of what they must believe will be more bad news.
But what must be starting to become clear is that the so-called “green shoots” of a recovery might turn out to be false hopes.
Willis said Treasury’s December forecast of growth among our trading partners reaching 2.5 percent for the June 2026 year would be cut back by half a percent.
At the same time, inflation among them was likely to be half a percent higher than the 2.5 per cent forecast for June 2026.
The big problem is China.
It is our largest export market, taking as much as the United States and Australia combined and 35 per cent of all our dairy exports.
China narrowly surpasses the United States as our largest market for meat and wool; it is also our largest market for logs and seafood.
We are in a situation where (to paraphrase an old saying) if China sneezes, we will likely catch a cold.
The February Reserve Bank Monetary Policy Statement directly addressed the possible impact of US tariffs on New Zealand.
“The indirect effects for New Zealand are likely to be larger than the direct effects,” it said.
“For example, tariffs between the US and China may reduce GDP growth in these economies, contributing to lower demand for New Zealand’s exports, even if tariffs are not directly imposed on our products.”
The Bank’s forecast was more brutal than Treasury.
It forecast that US tariffs could reduce growth among our trading partners by one per cent.
“Slowing global demand is likely to reduce demand for exports and lower business investment,” Willis said.
“Higher world prices for our imports compared to export prices will reduce the terms of trade, which in turn affects profitability.
“Treasury expects that financial markets will keep fluctuating.”
President Donald Trump’s announcement yesterday that he would impose an additional 50 per cent tariff on China’s exports to the US would result in a total tariff of 104 per cent on them.
China was defiant in a statement from the Ministry of Commerce.
“China will fight till the end if the U.S. side is bent on going down the wrong path,” the spokesperson said.
At the same time Central Huijin Investment Ltd which is owned by the State Council of China has moved to purchase shares in a number of publicly listed Chinese companies with the intention of trying to stabilise Chinese stock markets which saw big falls on Monday.
Nevertheless, Willis is worried about what this might mean for the dairy payout which is currently forecast to be a record $10 a kg.
“I would anticipate there would be disruption to dairy flows, but how that finally sits in terms of commodity prices is yet to be seen,” she said.
When the Bank issued the Monetary Policy statement, it didn’t know whether the US would impose tariffs or, if it did, at what level.
It would be unlikely that it would have anticipated a 104 per cent US tariff on Chinese imports.
Willis is six weeks away from presenting the 2025-26 Budget.
She said she didn’t yet have final sign off from the Cabinet on what it would contain but she maintained she would be standing firm on the $2.4 million that was announced in the Budget Policy Statement last year as the operating allowance.
Much of that will be earmarked for health, and some will be required for the revamped Defence Capability Plan, but much of the expenditure on new equipment will be capital expenditure.
She said she remains committed to the current fiscal and debt targets, even though the previous Labour and National Governments accepted that debt targets could be exceeded if a “rainy day” came along.
The US tariffs would surely stack up as a rainy day.
But Willis is not for turning.
“I’ve always said that the operating allowance is a ceiling, not a floor,” she said.
“So we won’t exceed the operating allowances, but there is always optionality around where it sits.
And we have that target to get our books back in balance and to be reducing debt. “
However she does have two workarounds up her sleeves.
She can find savings across the whole of Government.
“The point that’s often missed with the operating allowance is that operating allowances are a net concept so it’s not just what’s the new money we put to one side, but it’s what other money is available to us if we reprioritise spending that would otherwise have been allocated elsewhere,” she said.
“That approach meant that in last year’s budget, we delivered $23 billion of additional savings that we were able to reprioritise in order to support tax relief and a range of other government commitments.
“There will be the same approach in this budget.
“It’s not just about operating allowance, it’s where we’re able to re-prioritize funding to support things.”
Otherwise, there is the Reserve Bank.
It was the Bank that came to the Covid party with its $55 billion Large Scale Asset Purchase programme.
But given that National has been highly critical of that amount of money being pumped into the economy and the inflation that flowed from it, it would seem unlikely Willis would want the Bank to go that far again.
Instead, she hinted they might be able to offer some stimulus by keeping interest rates low.
“They (the Reserve Bank) always observe our fiscal decisions in the budget and those flow into their decisions around interest rates and as I’ve said before one of the reasons you need a government to be disciplined about its own spending is so that inflation stays lower and so the Reserve Bank has the optionality to reduce interest rates further,” she said.
It was the British Prime Minister Harold MacMillan who is supposed to have famously said that the most troubling thing in his Prime Ministership was “events, dear boy, events.”
Since 2008 and the Global Financial Crisis successive New Zealand Prime Ministers have had to confront the Christchurch Earthquake, the Christchurch Mosque shooting, Covid and now, Trump’s tariffs.
No amount of planning, no manifesto promise, not even a quarterly Ministerial target can prepare a Government for a crisis like the current one.
But crises like this are when Governments, and particularly Prime Ministers, define themselves.
So far the response we saw yesterday, which might be described as measured caution, taking the public into the Government’s confidence, would seem to be the way to go.
