Turns out the glass was half empty after all

Sunday, 21 September 2025

The Finance Minister has reacted to the 0.9% GDP contraction by saying the economy “suddenly had the stuffing knocked out of it” by the US tariffs.

Vernon Small is a journalist and former Labour Government advisor.

OPINION: Seems the economy’s awful 0.9% contraction in the June quarter more than justified the gloomy sentiment from the “merchants of misery” in the media and business punditry.

Worse still on a per capita basis – the measure better suited to measuring the impact on the consumer in the mall – the June contraction was an even more painful 1.1%.

Finance Minister Nicola Willis is right to stress the June numbers released this week are the picture seen in the rear-view mirror, and the driving conditions now, and on the road ahead, are looking better - at least on paper forecasts. Also, bear in mind that the metronomic tick-tick of businesses folding or in strife (even in provincial areas that are basking in higher primary production export prices) will weigh on what otherwise should be better GDP numbers in the September quarter and beyond.

But either way, the shock June GDP figure – three times as bad as the central bank had expected and twice as bad as the broad consensus of bank economists – will shake already fragile sentiment in the here and yet to come.

That will have political as well as economic consequences, and frankly the Government doesn’t have a lot of capital in the bank on that score.

A series of surveys have shown the Opposition edging ahead both in terms of political support – though the margin is only a couple of seats here or there - but more concerningly in the public’s view of who is better placed to handle the cost-of-living crisis and a range of other measures of economic and social wellbeing.

Carmel Sepuloni says Nicola Willis has to take responsibility for GDP going backwards and should stop blaming the previous government and US tariffs for the shrinking economy.

Even the Government’s narrative that the current woes can be laid at the previous government’s doorstep is starting to fray, with the latest RNZ-Reid research poll finding 38% blaming the current government and 31% the previous one, with 24% taking the “equal plague on both their houses” option.

Labour has sniffed blood in the water and is already trialling a campaigning theme that is one step removed from “time for a change”; that the country can’t afford another three years of this Government. However, Labour is yet to grasp too many policy nettles. Its targeted leaking of a capital gains tax confined to residential investment properties looks watery and risks a political fight for no good revenue. Nor has leader Chris Hipkins yet made clear how he will campaign to govern with, but not “with” Te Pāti Māori.

On Thursday Willis turned her blame radar on the Trump administration’s tariff announcements for disrupting her momentum – evident in the robust growth figures in the previous (March) quarter.

But that begs a couple of questions. Why have other countries facing a similar or worse threat of high tariffs fared better? Even Canada, which was looking at extremely high tariffs as well as a semi-ludicrous merger and acquisition threat from President Trump’s United States, shrank at less than half the Kiwi rate. And what of the surveys that have shown a shift in concern from international to domestic factors?

The best explanation is that the mood here was already more fragile than in other countries so we reacted that much more negatively to Trump’s tariff tantrums.

But another factor may be that in Australia, Canada and the United Kingdom the governments’ arguments against Trump’s measures were more full-throated and came from governments more ideologically hostile to Trump’s broader agenda – not something you could say of ACT or NZ First if not National.

Prime Minister Christopher Luxon and wife Amanda were seen arriving at a fundraiser dinner at Auckland War Memorial Museum on Thursday after it was revealed that the country had experienced a 0.9% GDP slump in the 2025 June quarter. 180925

In the case of the UK and Australia the upshot of negotiations was that they now face lower tariffs than us, undermining our competitive position.

Now we wait to see how the Reserve Bank will react.

Its decision to pause cuts in July (three months after Governor Adrian Orr’s swift exit) can now be seen for what it was – a blunder and one that speaks volumes about the central bank’s ability to read the real state of the economy.

Now, in the face of the “historical” June contraction the market is lowering its expectations of the nadir for the official cash rate, from 2.5% to 2.25% and even 2% as the economy cries out for greater stimulus.

The RBNZ is the only player likely to respond, even from behind the fig leaf, that it is only targeting inflation.

The Coalition is clearly not promising any further pump-priming. Willis is increasingly stressing how much stimulus her Budgets are already providing as the Government borrows and forecasts deficits out to the 2029 election.

If there is any (caveated) good economic – and by extension good political news for the Government - it is that mortgage rates are now likely to fall further and more quickly. There is a real possibility that if the current response to the June shock beds in, we will see shorter-term home lending rates fall to the low 4% range, and even flirt with the psychologically triggering 3% mark. That might in turn give the moribund housing market a shot in the arm.

But remember not to be too cock-a-hoop if your mortgage rate falls further.

This is not the reward for a strongly growing economy that is back on track.

This is the result of an economy that is under the cosh – even if it was wielded by the RBNZ – where job security is low, wallets are light, and we are still scanning the horizon for better times ahead.

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