Trump tariffs won’t be factored into Treasury’s half-year forecasts

Tuesday, 12 November 2024

ANZ believes the Half-Year Economic and Fiscal Update on December 17 will show the Finance Minister walking a “political tightrope”.

Concerns are rising that the Treasury will need to downgrade its growth forecasts for the economy and push back the Government’s expected return to surplus when it releases a major update next month.

But the Half-Year Economic and Fiscal Update (Hyefu) due to be released on December 17 may still be rosier than warranted because of its timing.

A Treasury spokesperson said it had finalised the economic forecasts it would release in the Hyefu earlier this month.

Although it did so shortly after the United States elections, it had been too soon for it to take into account the possible impact of President-elect Donald Trump’s proposed tariffs, he said.

“There has been little time to consider the policy detail of the Trump administration and therefore include it in the central forecasts.”

Russian President Vladimir Putin congratulates Donald Trump on his U.S. presidential victory and discusses the potential for improved relations, speaking at the Valdai forum in Sochi.

A fuller assessment would be made in time for its Budget forecasts in May, he said.

At last year’s Budget, the Treasury was forecasting the economy would grow 1.7% in the year to June and at the rates of 3.2% and 2.9% in the following years.

Because of the knock-on impact on tax revenues, any reduction in those growth rates has the potential to delay Treasury’s current projection that the Government should return to surplus by the year ending June 2028.

Trump has signalled his intent to impose 60% tariffs on imports from China and tariffs of between 10% and 20% on other countries.

Fitch Group forecasting arm BMI responded on Tuesday by downgrading its expectation of the economic growth New Zealand could expect in the 2025 calendar year to 1.8%, from its previous 2% forecast.

Finance Minister Nicola Willis has already “warned of downside risks to the forecasts going forward”.

“Risks to our growth outlook remain tilted to the downside,” it also said.

ANZ chief economist Sharon Zollner said that even without taking tariffs into account, the Treasury’s previous May Budget forecasts were looking “rosy”.

Senior economist Miles Workman said the bank would soon be updating its own growth forecasts for the economy and was looking at something “weaker than that”.

While there were a number of “stabilising feedback loops”, tariffs would still reduce growth, in large part because of the impact they would have on China, New Zealand’s largest trading partner, Workman said.

“We would be expecting the Treasury to downgrade things at the Hyefu slightly, at least in the near term.”

Nicola Willis denies Government accounts show need for tax reform.

But instead of writing off much economic growth, Treasury could assume much of it would be delayed until towards the end of its forecast horizon, which in the case of the Hyefu will extend out to June 2029, he said.

That appears to keep alive the prospect that the Treasury could still forecast a return to surplus at least by then.

“It's hard to see them putting persistent weakness in over their entire forecast horizon,” Workman said.

BNZ research head Stephen Toplis said in a research note that, outside of the US, “most of the rest of the world seems to be preparing itself for higher inflation accompanied by lower growth”.

“A Trump regime probably means lower domestic growth … a lower New Zealand dollar than otherwise would have been the case, higher inflation, in part driven by that weaker dollar, higher interest rates than would otherwise have been the case,” he said.

The Treasury reported last month that the Government deficit in the year ending June 30 had come in $1.8 billion higher than its Budget forecast and it has since reported it overshot forecasts by $669m in the three months to end of September.

Finance Minister Nicola Willis appears to be attempting to lower expectations of the future shape of its books ahead of the Hyefu.

She warned last week there were “downside risks to the forecasts going forward”, also saying the accounts for the three months to the end of September highlighted the “uncertainty and potential risks associated with forecasting”.

Workman said Willis was in a very difficult position.

“If she really wants to preserve a surplus for the 2028 financial year, she does have options.

“But she inherited the books in a terrible shape and trying to put them back in order while keeping everybody happy is a political tightrope to walk.”