Incoming US President Donald Trump's trade policies will reduce New Zealand's economic growth next year, and could even force an increase in interest rates in a worst case scenario, a new report has claimed.

BMI, a unit of research and rating firm Fitch Solutions has published an updated outlook for New Zealand in 2025.

It said economic growth would pick up next year, supported by lower interest rates.

It expected the economy to have grown 0.4 per cent this year, as it struggled with rising unemployment, high inflation and higher interest rates for most of the year.

Although inflation had eased, headwinds continued, it said.

It has reduced its forecast for next year from 2 per cent growth to 1.8 per cent, "to account for potentially lower growth due to Trump's trade policies".

"The anticipated weaker growth in key trading partners, slightly stronger import growth, and potential trade disruptions, should Trump follow through on his electoral promises to implement sweeping trade tariffs-have led us to revise our 2025 growth forecast downward.

"A second Trump presidency could have profound implications for developed market economies, including New Zealand, particularly those with substantial trade relationships with the US," it said.

Policies implemented during Trump's first term, especially those related to trade, had already demonstrated the potential for significant economic disruption, BMI said.

"Factors such as economic openness to trade, the intensity of trade ties with the US, and the effects of trade tariffs on global and national growth are likely to converge, potentially curbing growth momentum.

"These factors could influence financial conditions, consumer spending, and corporate investment, although the scale of the potential impact remains uncertain."

Trump's proposed policies including tax cuts, trade tariffs and deficit spending could trigger a fresh wave of inflation, it said, which could compel the US Federal Reserve to stop cutting interest rates and, in the worst-case scenario, potentially reverse it.

"If this happens, the RBNZ, along with other central banks, might be forced to either slow down their own easing cycles or outright raise interest rates to combat inflation. Such actions would lead to higher borrowing costs, potentially stifling growth and increasing economic uncertainty."

It said the expected pick-up in growth next year hinged on more activity from households and businesses as interest rates fell and there was a risk growth would not be as high as expected.

"New Zealand households are particularly sensitive to a high-interest-rate environment, possibly more so than their counterparts in other developed markets, due to their high levels of household debt.

According to data from the Bank for International Settlements, the household debt-to-GDP ratio in New Zealand was 91.3 per cent as of Q1 2024.

This figure is several percentage points above the developed market average of 70 per cent underscoring the greater financial vulnerability of New Zealand families compared to those in other developed economies, BMI said.

-RNZ