‘This is the medicine’

GDP numbers due today should show if New Zealand is out of a technical recession. File photo.
Photo: 123rf.com

The question of whether the country is out of a technical recession will be answered today, with new data expected from Stats NZ.

Through the end of last year, the economy shrank for two consecutive quarters – meeting that definition.

While most economists expect gross domestic product (GDP) numbers to show some increase in activity in the data for the March quarter, it is likely to be small.

And for households and business, in general, the downturn grinds on.

So what’s going on, and what will it take to get out?

How does this downturn compare to previous?

BNZ chief economist Mike Jones says this downturn is different in a few ways.

Some of the tough conditions and the pain have shown up in other areas relative to past downturns,” he said.

“We haven’t seen big declines in top-line GDP, for example. We’ve certainly seen the pain felt in things like profitability, margins, revenue. I get the sense from people that there has been a bit of head scratching as to why that hasn’t been reflected in the macro statistics.”

ANZ senior economist Miles Workman agreed GDP had generally held up well since the pandemic hit.

“It is more the last year where GDP has flattened off. If you look through those lockdown quarters, the cumulative loss in GDP has been nowhere near what it was during the GFC.”

But he said, on a per capita basis, adjusting for the significantly larger population of recent years, the decline in GDP was about the same as in the global financial crisis.

Economist Shamubeel Eaqub said the recession was showing up first in things like falling company profits and overdue tax.

“People sometime say this is the worst ever,” said Infometrics chief executive Brad Olsen.

“But on a levels basis it’s clearly not. Construction levels are down from peak and still above just about any other time before the pandemic. The total dollars being spent is larger than any other time before the pandemic. But the shift, the per household, per business impact, looks a lot harsher.”

He said an unusual aspect was that businesses were still putting up their prices at a faster rate than normal, despite the tough economic conditions.

Jones said the downturn was also being felt through inflation and cost of living pressure, rather than aggressive job cuts at this stage.

“There’s lots of talk about perfect storms, lots of shocks and things going wrong at the same time.”

Where is the squeeze showing up?

While unemployment has only increased by a relatively small amount, and GDP has been bumping along, other measures are showing more movement.

One is retail spending. Statistics NZ said total retail spending fell 1.1 percent in May 2024 compared with April. It is part of an ongoing downward trend in spending, even at a time when the population is increasing.

Olsen said the fall in consumer spending recorded at the end of last year was the largest since 1992, excluding the first lockdown.

Credit bureau Centrix said consumer arrears were 10.5 percent higher year-on-year in its latest update. Company liquidations were up 19 percent.

Construction activity was down 4 percent or 5 percent. Business profits were down to their lowest level since 2017. Profit margins have fallen.

What’s caused it?

To put it simply, monetary policy.

The Reserve Bank set out to engineer a recession to slow inflation by increasing interest rates.

“This is not an exogenous shock like a financial crisis,” Workman said. “This is paying the piper, this is the medicine.”

There has also been weakness in the export market – largely because other countries have also been trying to manage inflation in their own economies.

How do we get out?

Workman said the only way out was to keep going.

“The way out is to tighten the belts. We have to go through the painful adjustment period and do that for long enough that inflation will come down and central banks will be able to ease rates. It’s a bitter pill to swallow but at the same time you don’t hear people complain when the government is giving everyone handouts through wage subsidies… there’s always a bit of a lack of appreciation for the simple fact there’s no such thing as a free lunch.”

He said the alternative – much larger swings in inflation and the business cycle – would be worse. “It would lead to much more permanent scarring in the economy. Look at the Great Depression, the run-up to that in the roaring 20s. That’s the business cycle dynamics we want to avoid – that had a legacy that lasted a very long time.”

Pricing pressure would need to fall, Olsen said.

“We still have a lot of persistent pressures in the economy and to be honest some of them will be quite difficult to bring down.”

Things such as rent, rates and insurance remain a significant part of the inflation problem.

“You’re not going to be able to use monetary policy to bring down some of the insurance cost pressures … I think its a balance between on one hand a waiting game – those pressures are unlikely to continue at pace forever, they will moderate back over time – and at the same time we are likely to see prices in other parts of the economy won’t be able to increase at nearly the same pace.”

Jones said things would improve when interest rates started to come down, or when there was confidence they were about to.

It would also help when things improved in the global economy. “We are in a bit of an air pocket at the moment, it’s shaping up as a pretty tough year all round.”

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