New Zealand’s economy is on a precarious path due to the protracted trade war between the world’s two largest economies, the United States and China, which are also the island nation’s third-largest and largest commerce partners respectively.

Although the country’s exports have seen an upbeat performance these years, politicians and monetary policy-makers alike are taking a cautious stance to avoid a slowdown that is already happening elsewhere amidst global trade tensions.

Prime Minister Jacinda Ardern warned earlier this year that the trade war between the US and China could negatively affect her country’s exporters and hurt the economy.

“The worry for us is that further reductions in Chinese exports could cause a material slowdown in its economy, with adverse effects for New Zealand exporters,” Ardern told business leaders in February.

RBNZ to keep rates low

A similar warning came from the Reserve Bank of New Zealand (RBNZ) during its September policy meeting after it decided to keep its interest rate or the Official Cash Rate (OCR) at a historic low of 1.0 percent.

“Global trade and other political tensions remain elevated and continue to subdue the global growth outlook, dampening demand for New Zealand’s goods and services. Business confidence remains low in New Zealand, partly reflecting policy uncertainty and low profitability in some sectors, and is impacting investment decisions,” the RBNZ said in a statement released after the meeting.

However, it is worth noting that NZ employment remained around its “maximum sustainable level” while inflation performed within the RBNZ’s target range but still below the 2 percent midpoint.

Latest GDP and exports figures

The decision followed the earlier drastic 50 basis points rate cut in August that provided leverage in the currency exchange for the nation’s exporters who indeed shipped more goods abroad as a result of a larger Chinese demand.

In August 2019, NZ’s total exports rose by 151 million New Zealand dollars or 3.8 percent from the same period last year to 4.1 billion New Zealand dollars, particularly thanks to an increase in the export of kiwis, apples and sheep meat.

That was a reverse movement from the July figures which showed exports falling $309 million or 5.8 percent compared to the same period the previous year to $5.0 billion.

Although the exports appeared to have risen mostly in trade with China, the country’s GDP grew only by 0.5 percent in the second quarter of the year, confirming fears of a slowdown. The annual growth came down to 2.1 percent according to the government’s Statistics NZ, which is the lowest since June 2013. The first quarterly GDP was 0.6 percent.

A need for fiscal stimulus

Officials from the Kiwibank, a state-owned bank have called on the government to spur economic activity.

“What’s needed, is a strong fiscal policy. Monetary policy is proving ineffective without fiscal support. The budget is more important than the RBNZ’s MPS,” Kiwibank said in a September report.

The RBNZ expects to keep the rates low and may lower them further during its next policy meeting in November to support the frailing economy. The bank also hopes household spending and construction activity will be supported by low interest rates, while business investment is lifted by consumer spending in response to demand pressures from abroad.

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