A global recession is predicted for 2023, but what does that mean and how will it affect Aotearoa?
Over the last few decades New Zealand has experienced several recessions. There was a relatively brief one in 2020 as the economy reacted to the shock of the pandemic, but the last enduring recession was in 2008. An entire generation – anyone under 30 – hasn’t really ever experienced a recession. The Spinoff didn’t even exist in 2008. Facebook was a mere two years on from calling itself The Facebook. People still rented DVDs. Our current prime minister was first elected an MP towards the end of 2008 and our one of youngest MPs, Chlöe Swarbrick was 14 years old.
The Reserve Bank is now forecasting that New Zealand will enter recession from mid-next year and that it may last for four quarters – a whole year.
What is a recession?
Technically a recession is when there are consecutive quarters of shrinking growth in the economy. Growth is measured using Gross Domestic Product or GDP, which is the total value of the goods and services produced in a country. It’s the widely accepted metric we use to measure the health of our economy. GDP announcements are made each quarter (every three months) by Statistics NZ. In 2020 we had two quarters (six months) of negative growth, which met the definition of a recession, but growth recovered in the following quarter. No two recessions are alike in their causes or impacts but we can cast back to 2008 to get a sense of what a recession looks like.
What caused the 2008/2009 recession?
New Zealand experienced six quarters of recession in 2008 and 2009 prompted by the Global Financial Crisis (GFC). That means what we made and sold got less and less for almost two years. There were a swirl of contributing factors to the GFC but it was largely the result of the subprime mortgage crisis in the US and the debt crisis in Europe. Essentially a big speculative housing and debt bubble burst. In New Zealand, our banks remained stable but not all our financial institutions were immune. South Canterbury Finance, Hanover Finance and Bridgecorp Holdings collapsed, meaning many ordinary people who had invested in them lost their life savings. In total, between 2006 and 2012, 67 finance companies collapsed in New Zealand. It’s estimated between 150,000 – 200,000 people lost $3b as a result. There has been a large amount of reform since then to ensure that doesn’t happen again.
Between April 2007 and April 2011 the real house price, adjusted for inflation, fell by 15.3% in New Zealand. The unemployment rate grew from 3.7% in December 2007 to 6.1% in December 2008. Younger people found it hard to get jobs. The number of working age people receiving an unemployment benefit grew from 18,000 in June 2008 to 62,000 by the end of June 2010.
When we’re in a recession, people shop less, travel less and generally save more than usual – this is something Reserve Bank governor Adrian Orr explicitly asked us to do on Wednesday. The effect of that is that businesses lay off staff, and stop investing – which tends to feed on itself, as those laid off simply can’t spend as much as they used to.
Did it have a political impact?
Asking voters who could be trusted to lead the country through an economic crisis became a plank of the final days of the 2008 election campaign. “It’s time for strong and proven leadership” in an economic crisis became a key message for Labour. The electorate decided John Key and the National party were better placed to manage the country through, ending nine years of Labour government. New Zealanders don’t tend to give any government more than three terms in power but recessions and economic crises can prove to be a useful impetus for change. The forecast recession will inevitably have a bearing on next year’s election.
What about its real-world impact?
The recession of 2008/2009 had profound impacts on all kinds of businesses. The wind got knocked out of travel and tourism businesses for a while. The construction and property sector slumped. During the first quarter of 2009, car sales were down 40% from a year earlier. One in five used-car dealers closed down. In nine months, 100 hospitality businesses closed. Christmas parties in 2008 were often a BYO or DIY affair.
Some business categories thrive in recessions. We ate a lot of McDonalds in 2009, with the company having one of their best years in New Zealand. The fancy “Angus” burger was introduced to add some gourmet stylings to our growing appetite for cheaper food. Small cosmetics like lipsticks sold well, as did men’s underwear. Electric toothbrush companies were all smiles as people shelled out a little to avoid spending a lot on trips to the dentist.
If you worked in the performing arts, there was a lot of talk of “recession-proof” programming. People still needed cheering up right? But what did they want to see? Harking back to the cabaret of post-WW1 Weimar Republic Germany, The Sexy Recession Cabaret debuted in Auckland in 2009, starring a rotating cast of people like Keisha Castle-Hughes, Jennifer Ward-Lealand and Michael Hurst. People also turned to free activities. During the first two months of 2009, contraceptive sales grew 10%.
The cause of the forecast recession in 2023 is not financial system collapse but inflation, and the measures being taken to fight it. It’s being deliberately engineered by the Reserve Bank.
The Reserve Bank has deliberately engineered this?!
Yes. Essentially the economy is running very hot. Inflation is proving hard to beat and one of primary mandates of the Reserve Bank is to keep the rate of inflation between 1-3%. Inflation is simply the term used to describe the rise of prices for goods and services. It means money loses its value, resulting in consequences like a higher cost of living. It’s usually the result of too much money being available to purchase too few goods and services, or because demand in the economy is outpacing supply.
The Reserve Bank is using the rather blunt tool of lifting the Official Cash Rate (OCR) to try and cool spending. Increasing the OCR lifts home loan interest rates. That adds interest repayment costs to households which the Reserve Bank hopes will reduce household spending. People spend less and businesses have to drop their prices to stay competitive, which should hopefully see inflation drop. There is some talk that if we don’t get this situation under control, we could end up with stagflation.
A portmanteau of the words stagnant and inflation, it refers to the situation where the economy is struggling to grow and, at the same time, there is high inflation and high unemployment. It creates a paradoxical situation that isn’t supposed to happen with economies. It’s a stubborn stain that requires more than a light spritz of stain remover. Essentially you want to try and kill stagflation with fire.
It’s not a super relaxing scenario, no. The impact of the forecast recession will disproportionately affect those already struggling with the cost of living and those who’ve bought houses in the last couple of years – when interest rates were admittedly extremely low but prices were high. There is some good-ish news in that this forecast recession is expected to be shallow. We have high levels of employment and are described by boffins as “well-placed” to weather what happens next year. But every recession is different – the only thing certain is that it will be painful.
For more on the economy, follow Bernard Hickey’s When the Facts Change on Apple Podcasts, Spotify or your favourite podcast provider.
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