Podcast: the detail
How concerned should we be about the prospect of a recession? And beyond all the economic terminology, what does a recession actually mean to us?
Is New Zealand, as ACT leader David Seymour put it, “halfway through a recession”?
The latest GDP figures, released last week, showed New Zealand’s economy shrank 0.2 percent in the three months to March.
As economist and partner at Sense Partners Shamubeel Eaqub explains, the technical definition of a recession is that the economy is in decline for six months.
“Or there’s a more practical definition, which is when people get so scared of doing things, they don’t take anything, don’t invest, and don’t spend.
“And that collective imposition is really what recession is all about.”
As for the cause of a recession, RNZ business editor Gyles Beckford says it’s multifarious.
“If we look back at some numbers from the last few decades, the last prolonged recession we had in New Zealand was from March 2008 to June 2009.
“That was largely a reflection of the global financial crisis — the way the housing market started to fall, inflationary pressures started to rise, financial companies failed, foreign influences and the shocks that came with it, that’s the one we noticed the most.” .”
The most recent recession was in 2020, after the pandemic first struck. Beckford says it was no surprise given the sheer disruption of economic patterns, behavior and activity.
At the end of 2010, there was also a recession, largely caused by drought.
“You can have different types of recessions, for different reasons, and they will affect certain parts of the economy, or the entire economy, to varying degrees.”
Recessions often lead to an increase in unemployment. When an economy overheats, inflation rises, people don’t spend as much money, companies don’t invest or borrow as much money, and they cut costs.
Eaqub says New Zealand is relatively well positioned to weather that storm, as our unemployment rate is currently hovering around 3.2 percent.
And Beckford says some economists and academics may view a recession as a necessary period of pain to contain inflation. With less discretionary spending, there is less demand for goods and the price falls accordingly.
But according to Beckford, most economists don’t expect a recession within three months.
“It’s not unusual for us to have had a quarter of negative growth and then bounce back,” he says.
It is later in the year that global economic headwinds are expected to become more noticeable.
“One of the things to note is that in the past, many recessions were demand-driven — too much demand preyed on what was available,” Beckford says.
“A lot of the disruptions we’ve seen from Covid have been on the supply side of the economy.
“People are saying that these kinds of disruptions and pressures could become more pronounced as the year goes on. There are some unknowns, and one of the biggest is the war in Ukraine. We don’t know how long that will last and an impact on fuel prices, food prices , and how that flows through the global economy.”
Eaqub says recessions bring fear and caution, of course, but most people won’t be drastically affected by them.
And Beckford says it’s important to keep perspective in tumultuous economic times.
“The economy is not the goal. It is the means to an end, and that goal is that we seek to ensure a standard of living and prosperity for our nation, and provide the greatest opportunities for people to fulfill themselves in whatever way anyway.
“That’s what the economy is for. We need to worry less about whether it’s a negative number or a positive number, whether the Reserve Bank is chasing 8.7 percent inflation or 6 percent inflation.
“Ultimately, we should be thinking, what’s the end point of all this? And that way maybe people will shape the minds of the policymakers — the people we choose to make those decisions — and also shape our own thinking, and our own behavior.”
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