The R Word: bad news, NZ, this is what’s coming

We are all in for a period of pain here in New Zealand with the looming recession – it’s a certainty folks – likely to cause damage to households, people...

We are all in for a period of pain here in New Zealand with the looming recession – it’s a certainty folks – likely to cause damage to households, people and families.  This recession – which is likely to have already started by the way – is the direct result of our government closing down the functioning of the economy for much of 2020 and 2021 and even some of 2022 and 2023 with its “Covid response”.  Collapsing production, stopping tourism and borrowing / creating tens of billions to provide welfare payments.  As Devon Funds’ Paul Glass pointed out in his outstanding opinion piece in the NZ Herald last week… Government debt has doubled since 2017 to $224 billion with very little to show for it. Let’s have a closer look at the word recession and see what it actually means for us.

A recession is defined as a period of economic decline that occurs when there is a significant contraction in economic activity. This means that there is a decline in gross domestic product (GDP), which is the measure of a country’s economic output.  Recession is typically characterised by observing a decline in employment rates, falling consumer spending, and a decrease in business investment.

Recessions are caused by a range of factors, including changes in global economic conditions, monetary policy decisions, and shifts in consumer and business behaviour.  For example, a recession may be triggered by a sudden increase in interest rates or a drop in consumer confidence, leading to decreased spending and reduced economic growth.  Or in our case here currently, a severe spike in interest rates as a reaction to an arranged supply cut accompanied by a massive boost in money supply i.e. inflation.

Recessions can have a range of negative impacts on both individuals and society as a whole.  One of the most significant impacts of a recession is a decrease in employment, which can lead to high levels of unemployment and economic hardship for those who lose their jobs.  During a recession, companies or employers often reduce their workforce or slow down hiring, making it difficult for those who are looking for work to find employment.  This can create a cycle of unemployment and decreased consumer spending, which can further worsen the recession.

Additionally, recessions typically have a negative impact on businesses, particularly small and medium-sized enterprises (SMEs). During a recession, companies often face decreased demand for their products or services, leading to reduced revenue and profits.  This can lead to business closures and bankruptcies, which can further exacerbate the economic downturn.

Recessions usually have a negative impact on government finances.  During a recession, governments may face decreased tax revenues due to reduced economic activity. At the same time, increased spending may be required to support those who have lost their jobs or to stimulate economic growth. This can lead to increased government debt and deficits, which can have both short-term and long-term implications for the economy, and not good!

In addition to these economic impacts, recessions can also have negative social impacts.  High levels of unemployment and economic hardship can lead to social unrest, family pressures and increased crime rates.  This can further exacerbate the negative impacts of the recession, leading to a cycle of economic and social decline.

Generally, recessions last for several quarters or years, rather than months depending on the underlying cause of the recession, the strength of the economy before the recession, and the policy responses of governments and central banks.  The length of a recession is often measured by the number of quarters of negative GDP growth. For example,

In the United States, the global financial crisis (GFC) recession that began in 2008 with two consecutive quarters of negative GDP growth, lasted for 18 months.

The length of a recession can also be influenced by policy responses. For example, governments and central banks may implement measures to stimulate economic growth, such as monetary and fiscal policies. These measures can help to shorten the length of a recession or prevent a recession from occurring in the first place.

After a recession, the economy typically begins to recover as economic activity starts to pick up. This recovery period can be gradual or more rapid, depending on the severity of the recession and the policies implemented to support economic growth.

During the recovery period, there are several key economic indicators to watch for signs of improvement. These include increases in GDP, employment levels, consumer spending, and business investment. Other indicators, such as inflation and interest rates, may also be closely monitored to assess the health of the economy.

In addition to economic indicators, there are also social and political impacts of a recession that can persist beyond the recovery period. For example, a recession can lead to increased inequality, as some groups may be more adversely affected than others. It can also lead to changes in public opinion and political priorities, as people may become more focused on issues such as job creation, income inequality, and government spending. The recovery from a recession may also present opportunities for innovation and growth in certain industries or sectors.

In conclusion, recessions are bad news!  Reduced economic activity, job losses, lower take home pay for those still working, inflation eating away you pay etc…

What is our history of recessions in New Zealand?

New Zealand has experienced several recessions throughout its history, with some of the most significant being:

  1. The Great Depression: This was a global economic downturn that began in 1929 and lasted throughout the 1930s. New Zealand was particularly hard hit, with the country’s GDP falling by more than 30%. This contraction led to high levels of unemployment and economic hardship for many, many New Zealanders.
  2. The 1970s Recession: This was a period of economic decline that occurred in the mid-1970s. It was caused by oil price spikes and was characterised by high inflation and a decline in economic activity, which led to increased unemployment and decreased business investment. The government responded with a range of measures, including wage and price controls and remember “Think Big” projects, but the recession continued until the early 1980s.
  3. The 1980s Recession: This was a severe recession that occurred in the early to mid-1980s. It was caused by a combination of factors, including high inflation, a large government deficit, and a decline in the terms of trade. The government responded with a range of measures, including a significant devaluation of the New Zealand dollar (in 1985) and the introduction of structural reforms aimed at liberalising the economy.
  4. The Global Financial Crisis: This was a global economic downturn that began in 2008 and lasted for several years. New Zealand was affected by the crisis, with the country’s GDP falling by more than 2% in 2009. The government responded with a range of measures, including a significant stimulus package and a range of monetary policy measures.
  5. The Covid Recession: This was a global economic downturn that was triggered by government reaction to the Covid pandemic. New Zealand was initially affected in early 2020, with a significant decline in tourism and international trade. The government responded with a range of measures, including a significant fiscal stimulus package and a range of monetary policy measures – from which the chickens are now coming home to roost!

So there you go, and we’re in or heading in to another one.  The only way out of a recession is growth, so all Government policies herein with urgency must be growth oriented.  Otherwise, the recession and its negative affects as outlined above will persist longer than necessary.  Raising taxes won’t help, reducing the tax burden will.  Planting trees for carbon credits instead of boosting dairy, lamb and beef production – which we mostly export – won’t help.  Keeping tourists away and restrictive immigration policies won’t help.  Restructuring the health sector and water services delivery won’t help.  Etc, etc…get my drift?