1. The news that mattered this morning

Donald Trump's approval rating as US President rose to a record high (for him) of 45 percent last week during the 'zero tolerance' crisis. Gallup poll.

The big news in the political economy this morning is the growing fear that US President Donald Trump's trade war with China and Europe is now hurting global economic growth and could cause a recession.

Stock markets in Europe, China and America fell as much as two percent overnight as Chinese and European leaders warned that Trump's trade wars may cause a recession, and as Harley Davidson announced it would shift some production into Europe and Asia to avoid retaliatory tariffs.

China’s Vice Premier Liu He, who is President Xi Jingping's right hand man on economic issues, said after a summit with European Commission Vice President Jyrki Katainen that both China and the EU “firmly oppose unilateralism and protectionism and think these actions may bring recession and turbulence to the global economy."

US long term interest rates fell a couple of basis points to 2.88 percent and the New Zealand dollar nudged below 69 USc again.

All eyes locally are now turning to tomorrow morning's decision on the Official Cash Rate to be announced at 9 am. Everyone expects an 11th consecutive no-change decision, but all are also watching to see whether Governor Adrian Orr changes his neutral stance.

Some are beginning to wonder whether he may either indicate an even longer period of flat rates (the Reserve Bank forecast in May the OCR would not rise until late 2019), or even a potential cutting bias.

Capital Economics shifted its expectation for flat rates out to 2020 last week and yesterday ANZ shifted its expectation of the next move out to November 2019 from August 2019 because of a softer outlook for GDP growth and a more gradual increase in inflation.

Most local economists are still wary of inflation pressures, particularly given news of big new pay equity settlements and impending strike action by nurses and public servants (more on that below). But some signs of cooling growth and the risks of the trade war fallout (see above) are forcing some to consider the potential for a cut later this year or next year.

"There are risks on both sides of the ledger. But on balance, we think cost pressures – especially wage costs – will push inflation higher and that the OCR will eventually rise," ANZ Chief Economist Sharon Zollner said yesterday.

"That said, with forecast hikes sitting very late in the economic cycle, there are decent odds they may not happen at all. One of the key risks to up the ante of late is possible fall-out from trade war escalations. The implications for New Zealand are not yet clear. In the short term, New Zealand could benefit. But as a small open economy, we have benefited from the freeing up of global trade in recent years. We could be impacted significantly if this process were to go systematically into reverse or should the Chinese economy slow," she said.

Hence, the focus on the comments above from Vice President Liu on the potential for recession. Back here, the focus tomorrow around the political economy will be on ANZ's monthly business confidence survey results at 1pm. There are murmurings again about a building 'winter of discontent' in business confidence, although that's not born out in the investment, spending or GDP growth figures.

Nurses strike looms

Mediated negotiations between nurses and District Health Boards ended last night without an agreement, forcing them to ask for intervention by a facilitator from the Employment Relations Authority as the clock ticks down to a nationwide hospital strike next Thursday.

The New Zealand Nurses Organisation announced after 7pm last night that it had ended negotiations with the District Health Boards without agreeing a deal and was now preparing for strikes on July 5 and July 12, which would be the first nurses strike in 29 years.

The Nurses Organisation said it was now waiting for dates for formal facilitation under the Employment Relations Act and preparing for the strikes.

The news came as more than 4,000 Public Service Association members at the Ministry of Business, Innovation and Employment (MBIE) and Inland Revenue IRD voted to strike for two hours each on July 9 and July 23.

"MBIE is the agency which advises New Zealand businesses on how to conduct their industrial relations, and we expect better of them," PSA National Secretary Glenn Barclay said.

"Spending millions on contractors while denying our members a cost of living pay increase is poor practice, and it’s not in the spirit of the new Government’s expectations for the public sector," Barclay said, adding IRD staff had not taken industrial action in 22 years.

He was referring to the Government's announcement last week of an end to a cap on public servant numbers imposed in 2009, which it said had nearly doubled spending on consultants and contractors to NZ$550 million last financial year. State Services Minister Chris Hipkins also pledged to reduce the Government's reliance on contractors and consultants.

'Go for five times income'

Acting Prime Minister Winston Peters effectively committed the Government to targeting a house price to income multiple for first home buyers of five times income, which is well below current levels in the biggest cities.

However, he stopped short of calling for lower house prices or suggesting it would happen within the next six years. He said the Government aimed to significantly increase wages.

Peters told his post-cabinet news conference he looked forward to the day when a young couple can “prospect no higher than five times their annual income.”

"This is the Government’s “long-term objective,” he said, adding he did not expect it in the Government's first or second terms.

“But we will get there with these policies."

He pointed to the planned increase in housing supply through KiwiBuild and the increase in the minimum wage to $20/hour by 2020.

“It is our long-term objective to ensure first home buyers can obtain their first home in a way that is affordable without the desperation which I’m seeing today.”

Asked if he wanted house prices to fall, he said: “I’m not that naive.”

Wilmar dumps PKE supplier

Greenpeace published the results of an investigation overnight that it said proved Singaporean-based global food giant Wilmar, which owns Goodman Fielder and is the biggest supplier of PKE to Fonterra farmers, was linked to destruction of rainforests in Indonesia through its purchases from a company linked to family members of Wilmar's executives.

Wilmar announced shortly afterwards it stopped buying PKE from the company on June 20. ( Reuters )

Fonterra said it was checking with Wilmar to ensure it complied with Fonterra's Palm Product standard set in 2016.

"A key commitment in the policy is that all our vendors of palm products must publicly commit to policies that fully support “No Deforestation, No Peatland Development, and No Exploitation” and have business processes in place to meet compliance," it said.

Trump's popularity at home rising...

This may seem surprising given the near-universal outrage over his (now reversed) 'zero tolerance' policy of separating migrant children from their parents at the Mexican border, but Donald Trump's popularity is rising.

Gallup reported overnight Trump's approval rating rose last week to a new high during his presidency last week of 45 percent.

That is in line with other US Presidents at similar points in the political cycle. Barack Obama was at 46 percent, Bill Clinton was at 46 percent, Ronald Reagan was at 45 percent and Jimmy Carter was at 43 percent. Ninety percent of Republicans support Trump, while 42 percent of independent voters now support him, which is the equal highest week of his presidency.