Donald Trump’s tariffs will hinder economic growth but Nicola Willis vows to follow fiscal plan in upcoming budget

Finance Minister Nicola Willis says Donald Trump’s tariff policies could derail New Zealand’s economic recovery, which was expected to gather pace this year.

The Treasury estimated in December that gross domestic product would increase by 3.3% in the year ending June 2026, having grown just 0.5% in the year ending this June.

But those bets are off, after the US president threw the global trading system and financial markets into chaos with steep tariffs on all imports, particularly those from the Asia-Pacific region.

Willis told reporters the Treasury’s initial assessment was these tariffs would reduce the economic growth of our trading partners to roughly 2%—down from 2.5%—in the 2026 year.

This would inevitably be a headwind to New Zealand’s growth, as consumer demand weakens in countries hit with high tariffs, lower commodity prices reduce export income, and uncertainty discourages investment and hiring.

“Put simply, the past week's global developments make our recovery harder. These factors will also impact the government books with potential impacts for revenue, debt, inflation and interest rates,” Willis said.

Miles Workman, a senior economist at ANZ, said shaving 0.5 points off trading partner growth might slow the recovery a little “but shouldn’t stop the growth trajectory from pointing north”.

New Zealand does not have huge exposure to the United States—it bought about 13% of Kiwi goods exports last year—but does 70% of its international trade with Asia and Australia.

Willis said many of these economies were highly exposed to the new tariffs, as they exported a large volume of their goods to the US and many were facing higher rates.

Many of New Zealand’s Asian trading partners, such as Japan and South Korea, have been hit with 25% tariffs. Chinese imports will be charged an average tariff of 70%, which Trump has threatened to increase further after China imposed retaliatory tariffs over the weekend.

BNZ’s Stephen Toplis said New Zealand businesses were already dealing with a weak economy, margin pressure, and domestic political uncertainty.

“The last thing it needs now is this tariff fiasco,” he wrote in a note. “We fear that our current forecast pick-up in economic activity may yet be further delayed.”

RBNZ brainteaser

Tariffs also risk reigniting global inflation. The Treasury has estimated that trading partners’ inflation rate could hit 3% in the 2026 year, up from its December forecast of 2.5%.

Policymakers at the Reserve Bank (RBNZ) had already begun deliberations for the Monetary Policy Review, due this Wednesday, when Trump made his big announcement last Thursday.

The Monetary Policy Committee will have received emergency briefings from RBNZ staff, which will be factored into their final decision on Wednesday. It will be a tough decision to make.

Westpac NZ argued last week, prior to the tariff announcement, that the central bank should pause its rate cuts. But it has since reversed that position, saying the US government had metaphorically detonated a bomb on global trade.

“The news of rounds of retaliation between China and the US implies very elevated global growth risks. And that bodes poorly for the New Zealand outlook,” they wrote.

Willis has promised she won’t flip-flop on fiscal policy and will continue with the existing spending track, despite the risk of less economic activity and deeper deficits.

“To some extent, we had been anticipating some of the challenges that are playing out in the world, and that was why we were so clear that this would be a growth budget,” she said.

This means policy changes that made New Zealand a more attractive place for global investment and to operate a business, rather than any sort of fiscal stimulus. Willis said she would stick with the fiscal strategy, operating allowances, and aim for a budget surplus in June 2028.

“I've always said that the operating allowance is a ceiling, not a floor, so we won't exceed the operating allowance, but there is always optionality around where it sits,” she said.

The tight operating allowance means almost all new initiatives need to be offset by spending cuts in other parts of the budget. But this doesn’t rule out significant policy changes.

Willis even hinted the May budget may include tweaks to the tax system to better incentivise economic growth, such as lowering the corporate tax rate.

“What I've always said is that I'm interested in competitive tax settings. Now the corporate tax rate is just a headline indicator. My interest has been, what are the conditions more broadly in our tax system, and how do they support, in particular, businesses to invest and to grow?”

“Those are the questions that I have been contemplating as we've been putting together our growth budget," she said.