Could our rockstar economy handle a remix by DJ Trump? Don’t tune him out, says Bernard Hickey.
Donald Trump’s tweets, his angry phone calls and his rants at America’s (unfair!) media may seem like an irrelevant amusement from the vantage point of our strong economy at the bottom of the world, but it would be a mistake for anyone with an export business or a mortgage or a house to ignore him.
The people who run our economy certainly aren’t ignoring the potential havoc @realDonaldTrump could unleash inside the global trading system, and how that could spill over into our economy through higher interest rates and slower GDP growth.
Reserve Bank Governor Graeme Wheeler was surprisingly forthright with his warnings this week about the dangers of a Trump presidency for the New Zealand economy, which has plenty to lose given it is currently purring along nicely with a 3.5% growth rate and near-full employment.
Wheeler picked out the risk of a Trump-driven slowdown in global growth in tandem with higher inflation as the biggest risk on the horizon right now, particularly given the chances that Trump-lite politicians in France and Italy could further upset the globalisation apple cart in the year ahead.
“If you go to the US I think the biggest risk is primarily around protectionist policy,” Wheeler told his February Monetary Policy news conference.
He pointed to Trump’s cancellation of the Trans Pacific Partnership (TPP), the stalled talks between America and Europe over the Trans-Atlantic Trade and Investment Partnership (TTIP) and the orange one’s promise to renegotiate the North American Free Trade Agreement (NAFTA).
“You could end up with a situation, if it were followed through, of higher tariffs. And what would that mean to the global economy?,” Wheeler asked out loud.
You just knew he had an answer he’d prepared earlier.
“Let’s say for example the US really did get serious about imposing 45% tariffs on China, for example, or large tariffs on Mexico. Then that would have serious implications for the global economy,” he said.
“Because one thing it would do, it would raise inflation rates in the US. The Federal Reserve would need to push harder against rising inflation so those interest rates would rise. The exchange rate the US would probably rise. You’d see retaliation by other major countries.”
Wheeler had obviously thought through the scenarios, something he had no doubt done countless times during his 13-year stretch at the World Bank in Washington until 2010. (He may well end up back there soonish, given he is not seeking a second term and said this week he would look for more consulting work overseas again.)
He pointed to some research done by the OECD into what 10% tariff increases in China, Europe and the United States would do for the global economy. He said the OECD saw a 2-3 percentage point hit to GDP growth in those three economies — the three largest in the world.
“That would not unexpectedly lead to a very significant slowdown in global growth, higher cost associated with trade, reduced volumes of trade, and slower growth in the rest of the world, which would certainly affect us,” he said.
“So the biggest risk is the protectionist risk, and it’s unfortunate that a lot of this rhetoric is taking place at a time when we’ve seen the slowest growth in merchandised trade volumes in the last five years than we’ve seen since the early 1980s.”
New Zealand has enjoyed record high export receipts and historically high export prices in the last year (aside from a now-rebounding dairy price), so a slowdown in trade that hit commodity prices would hurt us.
‘Deploy the stabilisers, Captain’
This export hit would be doubly painful because New Zealand may not be able to rely on a falling New Zealand dollar and lower interest rates to soften the blow. These two automatic stabilisers were a huge help in 2008 and 2009 during the worst of the Global Financial Crisis.
Trump has already railed against a strong US dollar, raising the risk that a Trump-driven global economy would also have a weak US dollar (ie. a strong NZ dollar).
Short term interest rates are about as low as they can go here so couldn’t be cut much more, and long term interest rates have already risen in New Zealand because of the fear (or hope, depending who you are) that Trump will unleash a fiscal stimulus and tax cuts that pump up US debt and inflation. That has already flowed through into New Zealand mortgage rates. The average two year mortgage rate has risen from about 4.5% before Trump won in November to around 4.85% now.
There would be more to come if global financial markets started getting nervous about Trump, or more importantly, the possibly Euro-destroying election of Madame Le Trump (Marine Le Pen) as France’s President in May. France’s bond markets spazzed-out briefly on this prospect earlier in the week.
Wheeler worried about what that sort of disruption to those global financial markets could do, given that they still roll over tens of billions worth of short-term New Zealand bank debt every couple of months.
“It could spill over into liquidity and funding costs quite quickly,” Wheeler said.
That’s central bank speak for higher mortgage rates and banks being more nervous about handing out mortgages here.
America’s Muldoon and partying til 4am
Wheeler is not the only one in the bowels of New Zealand’s financial system casting a nervous eye over Trump and his kind in other big economies.
ANZ Chief Economist Cameron Bagrie is well aware of what is at stake here and in the parts of the world that would affected by Trump. ANZ, which is the most active Australasian bank in Asia, also has over NZ$67 billion worth of mortgages lent out in New Zealand, almost 30% of which are exposed to Auckland’s over-heated housing market. It is also owes over NZ$40 billion to term depositors here.
Bagrie told me this week the social contract between citizens and their leaders over globalisation is “being ripped up in front of our eyes.”
“Trump is just the start of it,” he said.
Bagrie was particularly worried about what a Trump-led drive to put up tariff barriers and unravel globalised production and distribution systems would do to supply chains that have driven down the price of all sorts of goods and services over the last couple of decades. A reversal could be painful in an inflationary sense.
He said Trump’s recipe for internalising the US economy smacked of the sort of thing that Robert Muldoon tried to do with New Zealand in the late 70s and early 80s — massively interventionist industrial policies and a morass of complicated and capricious barriers to trade. Except Muldoon drinks and Trump doesn’t.
Just the thought of a drunk Robert Muldoon in charge of a Twitter account should be enough to scare anyone. Muldoon vs Trump in a twitter fight would be something else entirely. And let’s not think about the phone call…
Bagrie cautions New Zealand’s households — the sixth most indebted in the world relative to incomes — to think about these risks before they get back into their old habits of using their houses like ATMs.
“It’s midnight at the bar and we have to decide whether to go home now or party on until 4 am,” he said.
He is hopeful that New Zealanders are more cautious this time around and will take note of these risks on the horizon such as Trump. Bagrie’s ANZ is just one of the banks giving homeowners a nudge in that direction out of the bar by offering slightly more attractive deposit rates and higher mortgage rates.
First NZ Capital Economist Chris Green is also eyeing the potential for higher interest rates globally that trickle down here. “You can certainly see a scenario where interest rates rise globally and New Zealand’s rise with them,” he said.
Green also sees the perverse potential for a higher New Zealand dollar in a Trump-led trade war, given Trump’s preference for a weak US currency.
The larger fear is that Trump’s policies might just take the world back to a Muldoon-like world that we saw in the 70s where inflation and unemployment rose at the same time as growth slowed — stagflation. Normally inflation and unemployment go in opposite directions.
That would be the type of economic tide that Trump would struggle to turn back with a tirade of tweets.
‘Rising inflation and a slowing economy are a disaster! So unfair!’
*Bernard Hickey (Twitter: @bernardchickey) is the editor of Newsroom Pro, our forthcoming premium subscription service. In more than 20 years as a financial journalist Bernard, who currently heads Hive News, has written for the Financial Times, Reuters, Interest.co.nz, Fairfax media, and the Herald on Sunday. This is his first story for Newsroom.
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