March Economic Update: Offshore events rising to the fore

Key highlights:
  • Donald Trump fails to pass healthcare reform legislation, raises questions over his ability to pass tax reform.
  • Brexit set to formally get underway, but the do-list is immense.
  • The French election draws closer.

It has been a busy week for events offshore, which continue to impact both New Zealand’s economy and financial markets. It does not look as if there is any respite either, with plenty ahead in the coming weeks.

Firstly, US President Donald Trump’s Administration failed its first major test, with the American Healthcare Amendment Act failing to garner enough support to even make it to the vote. While the impact of this specific act is mainly limited to the US, it has generated plenty of international volatility. This is because questions are now being asked of the Administration’s ability to pass other keystone legislation. This includes US fiscal stimulus and tax reform, which has a much greater direct impact on New Zealand via potential additional demand for NZ exports, although counter balanced with a possible increase in trade restrictions. Whatever the outcome of tax reform, Trump is already living up to the findings in the ASB NZD Barometer (see more here).

Importers and exporters alike picked Donald Trump as the most likely source of volatility in foreign exchange markets over the coming 12 months. He was placed ahead of European elections, NZ elections and Brexit.

The last of that list is due to get underway this week, with the UK Government set to trigger Article 50 on Wednesday. This is the formal beginning of the Brexit negations with the EU, which must be completed inside 2 years. This is generally seen as an ambitious timeline, with a massive list of issues to be discussed. As well as trade between the Union and the UK, issues such as EU legislation, border control (between the Republic of Ireland and Northern Ireland), defence and of course immigration also need to be settled. On top of that, many of the deals in place between the UK and the rest of the world are actually currently between the EU and the rest of the world. That means the UK needs to re-establish almost its entire relationship with huge expanses of the globe across a massive range of issues. Not only does the UK need to find a way to address all this issues, but the divorce bill with the EU also needs to be agreed, with some estimates as high as GBP 50bn. Getting all this settled within 2 years is clearly a tall-ask. If this is not achieved then the UK reverts to World Trade Organisation rules, which could generate an adverse situation for UK exporters, as well as those looking to export to the UK.

In the meantime, French Presidential elections are drawing closer, with the 1st round on April 27. If there is not a clear victor, a run-off between the two highest polling candidates takes place on May 7. Current polling has far-right candidate Marine Le Pen, of the National Front, in the lead on around 27%. However, her share of the vote is only expected to rise to around 28% of the vote in round 2. This compared to Emmanuel Macron, from the En Marche! Party (centralist, pro-business). Polling shows him rising from 26% all the way to 62% in round 2. However, polling did not have Brexit and Donald Trump as favourites either. Should Le Pen win, she has said she will hold a referendum on France’s place in Europe, although the UK’s experience may make her think twice.

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