How did we get here? What factors lead to the economy shrinking?
Probably the big one that people who have mortgages are really feeling is the interest rates going up.
This is where economics comes back to the supply of money in the economy. When there’s a lot of money supply, there’s more money to flow around. We literally did print money and lowered interest rates through the Covid pandemic in order to, for example, help businesses stay afloat while they were going through lockdown and things. Those lower interest rates and some of that money printing were a major cause of inflation. Then the cost of living went up and we had a cost of living crisis.
Unfortunately, the way to solve that is to put up interest rates and restrict the money supply or bring the money supply back down. The Reserve Bank puts up the interest rates, the money supply starts to constrict, because, for example, businesses with debt and people with mortgages start to have to pay more, and so they put their wallets away and spend less. And that absolutely is the biggest driver of this recession.
Some economists have suggested that it’s more of a controlled recession. It’s more like a burn-off rather than a wildfire. Other times we’ve had recessions where it’s been due to things like the global financial crisis or or our export prices crashing. And we don’t have much control over that. This is more a case of the reaction we’d expect to what the Reserve Bank has done with the interest rates.
How long is the recession going to last? How will we know we’re out of it?
We’d be out of the technical recession as soon as we see a quarter with some growth - and that’s just sort of a statistical thing. In fact, GDP is such a complex measure that often Statistics NZ will revise the number, and because it was just a 0.1 per cent fall, we might even be revised out of recession - it might never have happened.
But let’s assume it has. It could well be that we bounce out of a technical recession in the next quarter. But it doesn’t mean that the economy will have suddenly come right. We’ll probably see some growth over the next year, but it’s going to be lower growth than we’re used to.
What does that mean for the average Kiwi and our day-to-day costs e.g. food, petrol, rent?
It’s important to remember that recession and inflation are different.
For example, the cost of living crisis was actually a symptom of excess money in the economy.
In a lot of ways, while we had inflation, we also had a really tight job market: people were able to swap around their jobs, they could get promotions and wage growth was quite strong.
Obviously, people didn’t feel they were keeping up with inflation — it was still hurting. But that inflation, and the cost of groceries, and things like that is actually hopefully going into reverse.
The recession should bring inflation back down to earth. It may even mean that some things are cheaper than they were - that’s good news as the tighter economy brings costs and prices down.
But, of course, what’s happening in the transition is that businesses are cutting costs, which means fewer wage rises, taking on fewer staff, or cutting staff.
In fact, we expect unemployment to rise through this period from about 4 per cent to maybe 5 or 5.5 per cent. So, the real risk for the average New Zealander is first of all, losing your job - that is the worst thing that can happen. Then lower wage growth and fewer opportunities to get better jobs as the economy contracts and businesses do less activity - they’re less confident and don’t want to expand.
In fact, you end up seeing a reverse of the inflationary spiral. You see consumers react to that. If we panic about recession then people will put their wallets away and they’ll stop spending, businesses will take even less money, and they’ll have to cut costs even further and contract even further. This is how you get a downward recessionary spiral - which can be a real problem.
Luckily, with this one, if it gets that bad, the Reserve Bank has some control that it can start to cut interest rates. That’s when talk about how long it’s going to this whole recessionary period. It’s all about when the reserve bank feels comfortable cutting interest rates. And so how much of a contraction we need to get inflation back down to really under 3 ideally around 2, which is the goal for the target for the reserve bank.
How does this affect Gen Z?
I think a recessionary environment is tougher for young people. Initially, there was quite a lot of opportunity around when we had a couple of years of that high inflation environment. Now it’s tougher. Now the risk is just the lack of opportunity or the risk of losing your job. If you’re Gen Z and don’t have a mortgage, and you’ve still got some freedom in your life to take some risks - it might not be so bad.
The people, I think, who really get squeezed by recession, or are at most at risk, are often young people with young families, maybe in their thirties, who’ve just taken on a big mortgage.
Which sectors are more likely to be hit harder than others?
At the front end, I think that we’re going to see hospitality and retail hit quite hard. People have discretionary income (money to spend on eating or drinking out, buying new clothes, etc) but when they see that recession word, confidence leaves the economy. They feel cautious. They’re worried about losing their job or not getting a pay rise, so they may delay spending on those other things.
I think we’re also seeing it hit the construction sector. That’s not just to do with the recession, but it’s a combination of all the costs of that previous period. The high interest rates are really hurting building companies. And we’re seeing them.
Will prices ever go down?
Weirdly, a recession can help the prices go down. It sounds counterintuitive, but you really don’t want deflation, which is when prices actually fall.
When prices start really falling, it’s because businesses are making no money, and you’ll find that that’s a recessionary spiral. So they’ll be cutting costs and cutting staff and basically, the more seriously the the economy goes backwards, the more likely it is that we’ll see prices keep falling.
But what modern economies aim for is just stable, steady inflation. So we want to get it back down to about 2 per cent or even 1 or 2 per cent growth. So prices rising, but wages rising more. So ideally, you’d have some price growth that’s manageable and people can cope with. What we really want is wages to go up by more, and we want that to be driven by people creating more wealth by doing more in the economy.
New Zealand has a problem with productivity. We work too hard for too little results. But I think the goal is that we find our way out of recession by driving productive growth, which means selling more goods and services to the world to get more money into this economy rather than our government just pouring borrowed money into the economy, which can make us feel good in the short term, but creates problems further down the line.
Liam Dann’s new book, BBQ Economics (RRP$40, Penguin Random House) is out now. Also available as an audiobook. For more stories from Liam, click here
