With all the talk of a recession, Northlanders ask what that means for them

NZ Herald business editor at large and BBQ Economics author Liam Dann explains what this recession means for your back pocket.

Last week economists announced New Zealand was officially in a recession. Since then, Northlanders have been frantically searching Google to understand how this might affect them. Advocate reporter Myjanne Jensen speaks to NZ Herald business editor at large and author of BBQ Economics, Liam Dann, to find the answers.

What does it mean to be in a recession?

Basically, being in a recession means being in a period where the economy is contracting or going backwards instead of growing.

For example, if a factory’s output is sending out more stuff, then it’s obviously growing, but if there is less happening, then it’s shrinking.

The way we measure if we’re going through a recession is through something called a technical recession, where we look at the two last quarters of the economy.

If both quarters have gone backwards, then that’s when economists will call that a recession.

That’s the agreed definition, however, there isn’t any one official definition for a recession.

It’s also based on historic data, which can take a while to count, so this recession is referring to the last half of 2023 that went backwards.

The other important thing economists look for is the overall top-line figure of the economy, or the data per capita.

For example, an analogy for this could be when you think of Olympic medal tallies, New Zealand is always up there when you look at the number of medals per average population.

In terms of the economy, we’ve added a large number of people in the last year through migration (about 130,000-140,000), so on an individual basis, we’re down 3 per cent, so quite deeply in recession if you look at it that way.

Liam Dann says the overlapping of the recession with inflation has made people feel poorer. Photo / Babiche Martens

What does a healthy economy look like?

A healthy economy is where inflation (the increase of prices) is sitting 1-3 per cent, ideally at 2 per cent and where there’s a stable supply of money, prices and the growth of gross domestic product (GDP) is growing at a rate of around 2 per cent a year. It also means unemployment is relatively low.

How would an everyday person be feeling this recession?

It really comes down to personal experience, but the present situation has been complicated by the overlapping of the recession with inflation, and that has made people feel poorer.

Inflation is a slightly different situation that was caused by the stimulus from the Government during Covid-19 to stop companies collapsing, but meant the price of things suddenly went up.

That’s the way the system works — the Reserve Bank pushes interest rates up to take money out of the economy, and that may well have felt recessionary for many people.

The real pain will be measured by how many people lose their jobs and how many businesses go under.

The biggest thing to watch for is a rise in unemployment that will come as a result of businesses struggling to make money and needing to cut costs because there are fewer people out there with money to spend.

The people most vulnerable will be those who lose their jobs and who have a large mortgage. Those people, usually people with young families, are the ones now suffering from paying higher mortgage rates, so will already be doing it tough.

How does this compare with past recessions?

Even though per capita this is quite a deep recession, in terms of the GDP, it’s only marginal at around 0.1 per cent.

It will feel deep to some people because we’ve been experiencing unemployment at historic lows.

It won’t have the same impact of some of the other recessions, which saw unemployment at around 10 per cent during the 1990s and at around 7 per cent after the global financial crisis (GFC).

At the moment we’re sitting at around 4 per cent, which might go up to 5 per cent, so at the moment, we’re holding up reasonably well.

How long will this recession last?

It will be a tough economy until interest rates start coming down, which is expected later this year, maybe around November.

That seems a long way off for people already struggling to pay their mortgage, so I think we’re in for a tough next six months.

The upside to all of this is that the cost of things will start to come down and things tend to get cheaper during a recession, so that’s sort of a good thing, even though it means businesses lose money, which is a big thing.

Many economists are looking at this recession in some ways like the analogy of a controlled burn-off as opposed to a wildfire.

There’s a sense that the Reserve Bank is helping to slow the economy down, which along with Government cost-cutting, will help drop interest rates.

So it’s not true to say the Reserve Bank is causing the recession, it’s just helping to slow the economy down to regain some balance.