The strength of the US dollar could keep US interest rates high for longer. File photo. Photo: 123RF
Uncertainty is expected to continue to dominate the economic outlook for 2025.
Salt Fund's new global outlook report expects United States President-elect Donald Trump's policy agenda to have implications for the world economy, with an increased focus on fiscal and trade policies.
"The precise measures remain unknown at this stage but appear to us to collectively point to lower growth, higher inflation and higher interest rates in the United States," Salt economist Bevan Graham said.
"Looser fiscal policy is good for growth but bad for inflation and interest rates."
Graham said the changes would bring wide-ranging implications for the rest of the world, most importantly for trade policy, which would have some affect on New Zealand which relied on exports for economic growth.
Trump was proposing a 10 percent universal tariff, with 60 percent on imports from China, along with recent suggestions to apply a 25 percent tariff on Canada.
"We know what the big topics are: tariffs, immigration, fiscal policy, bit of deregulation thrown in there as well. All of those things are going to have implications for us, growth, inflation and interest rates. And of course, what happens in the US matters for the rest of us as well," Graham said.
He said the uncertainty meant central banks would tread carefully when it came to further interest rate cuts.
Graham said interest rate cuts were still likely in countries where growth in activity was weakest, including the Euro zone, the UK and New Zealand.
The New Zealand dollar was trading near post-global financial crisis lows and Graham said it lacked a catalyst to recover soon, given the strength of the US dollar and inflation, which could keep US interest rates high for longer.
"Uncertainty around the Trump policy agenda means that the Fed (US Federal Reserve) is now on hold for the foreseeable future," he said.
The Fed was scheduled to update its monetary policy and interest rate settings on 29 January.
"A resumption of rate cuts, which we wouldn't see possible until March at the earliest, will require a renewed softening in the labour market or downside inflation surprises."
Graham said New Zealand's fiscal policy would also influence the direction of the economy.
"While it is true that our fiscal settings must be the envy of the developed world, the Half-Year Fiscal and Economic Update released in December underlined the structural nature of New Zealand's fiscal deficit and the challenge ahead for the government in balancing the achievement of necessary fiscal consolidation at the same times as meeting increasing fiscal challenges," he said.
Sign up for Ngā Pitopito Kōrero, a daily newsletter curated by our editors and delivered straight to your inbox every weekday.
