ANALYSIS: Last week, I discussed the way the balance of power in the residential real estate market is firmly in the hands of buyers and sellers are the party needing to get realistic about market conditions. That message needs to be strengthened now that the outlook for the world we live in has become so much more clouded as a result of the tariff war initiated by the United States.
No one seems to know if we are looking at the ending of open trade between nations, a global recession, soaring inflation, deflation, or whatever. President Trump may be simply using his power to gain concessions, or he may be trying to upend the entire post-Second World War order.
All we can say for certain is that risks for everyone’s cash flows have worsened and that means we have to factor into our outlook weaker profiles for business investment and consumer spending. We might have to factor in higher inflation and higher interest rates, or lower. It is hard to know.
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Inflation rates will probably be higher than they were going to be, but economies will likely be weaker and that suggests the inflation surges might be temporary and “looked through” by central banks as they contemplate what to do with their monetary policy settings.
But even with none of us being able to realistically generate forecasts with a high probability of being right, some clear courses of action are indicated. First, assets like shares are bought in greater quantities when people feel more certain about the future. Now that we have high uncertainty, it is not a surprise that share markets have weakened. What is surprising is that it has taken this long for the markets to factor in what was a known source of risk and uncertainty – Donald Trump.
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Second, in times of uncertainty the value of medium to long-term fixed borrowing costs is enhanced. By fixing one’s interest rates one potential source of cash flow volatility is taken off the table and this provides time and energy for management of other factors in one’s life and business.
Third, New Zealand is better placed to weather the economic storm - if it is truly coming - than many other countries. Only 13% of our export revenue comes from the United States, we have “only” been hit with a 10% tariff, and the prices of most things we ship to the US tend to be volatile. Buyers are more used to price rises and falls for primary products than manufactured ones, and that means much of the 10% price surge will be viewed as just another market price fluctuation.
Independent economist Tony Alexander: "If Asia's economies suffer because the US is ripping apart global supply chains, then we risk slipping back into recession." Photo / Fiona Goodall
Our true vulnerability lies with Asia, including China. If Asia’s economies suffer because the US is ripping apart global supply chains, then we risk slipping back into recession. We await developments.
Speaking of which, the Reserve Bank of New Zealand today reviewed the Official Cash Rate, and I don’t envy the committee the task of trying to set monetary policy in these very volatile and uncertain times. As was widely expected, the RBNZ cut the cash rate 25 basis points to 3.5% and noted it has the scope to cut further to combat offshore developments.
The key point to note is that the RBNZ did not point out it can also raise the cash rate if needed.
For now, the odds that the cash rate will fall to 3%, rather than 3.25%, have increased. That suggests scope for not just lower floating mortgage rates but lower fixed rate mortgages as well. However, if I were borrowing at the moment, I would either fix at 4.99% and get on with other things affecting my cash flows, or hold off a bit longer in case the 4.99% three-year fixed rate briefly made available a couple of months ago makes a comeback.
- Tony Alexander is an independent economics commentator. Additional commentary from him can be found at www.tonyalexander.nz
