How bad could a Reserve Bank engineered recession get?

Wednesday, 7 December 2022

Reserve Bank governor Adrian Orr admits he is “deliberately engineering a recession”, but business leaders and economists are concerned he could be going too far.

When Reserve Bank governor Adrian Orr admitted he was “deliberately engineering a recession” to curtail rising inflation and interest rates, concerns were raised among business leaders and economists.

A recession is the technical term for when an economy’s gross domestic product (GDP) shrinks for two or more quarters. It is usually accompanied by a rise in unemployment as businesses cut staffing costs to stay afloat.

Some in business have said the country will need to prepare for significant business closures and downsizing if recent predictions for economic prospects are realised.

The official unemployment rate has been running at between 3.2% and 3.3% this year, the lowest levels since the late 1970s.

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But the Reserve Bank has predicted a rise in unemployment next year to 4%. Some economists believe it could rise as high as 5%.

Employers and Manufacturers Association (EMA) head of strategy and advocacy Alan McDonald said a rise in unemployment to 5% would mean business closures and large workforce reductions.

“That’s terrible for business owners and their staff,” McDonald said.

Research from the EMA highlighted a critical staff and skill shortages because of immigration constraints, demand for higher salaries and the rising cost of doing business.

“Many of our members are at a low ebb. If the message from our central bank is to ask consumers not to spend and tell workers not to ask for bigger pay increases, then we are bereft of ideas for fixing our economy,” he said.

Council of Trade Unions policy director and economist Craig Renney (left) says economists are worried the Reserve Bank may be “over-egging the pudding”, in its bid to lower inflation.

McDonald said businesses were calling on the Government to fund workplace training, free up a congested immigration pipeline and encourage tax incentives for business investment.

Inflation could potentially be as disruptive as a new Covid-19 variant, and would require a joint effort from business and the Government to beat back, he said.

Infometrics principal economist Brad Olsen says a recession will impact the retail, hospitality and tourism industries far more than supermarkets.

Council of Trade Unions policy director and economist Craig Renney said the most vulnerable workers would be severely affected if the country went into a recession.

The unemployment rate rising above 5% would mean between 50,000 and 70,000 people losing their jobs.

But these jobs would not be spread evenly across the workforce, and would unfortunately disproportionately affect younger workers, Māori and Pasifika workers and women, he said.

“Those that are doing well and already own their homes and assets, they will be OK. But if you don’t, or have financial challenges already, then you will be in real trouble,” Renney said.

Economists were also worried that the Reserve Bank was “over-egging the pudding”, in its bid to lower inflation, he said.

“We have raised our OCR rate far quicker than many other countries. New Zealand was the first bank in the developed world to start raising interest rates. So there is a real challenge for us to make sure we are not overdoing things in response to inflation that will cause problems on the other side,” Renney said.

Those problems could be a potential “hard economic landing” and an unemployment rate rising faster and further than had been predicted, he said.

Infometrics principal economist Brad Olsen said the recession the Reserve Bank had forecast was a shallow one, but it would not affect all industries equally.

“If the economic environment and high mortgage rates strips back household spending, those households don’t just cast out a little bit of everything. They know they have to pay for food, fuel and a roof. They don’t go out and buy more things, they don’t go out on trips, or to eat.

“Because of this we expect to see the likes of hospitality, tourism and retail to be influenced more than many other sectors if we see a recession coming through,” Olsen said.

But people who were angry at the Reserve Bank for deliberately engineering a recession had the wrong end of the stick, Olsen said.

“The Reserve Bank has to be OK with overcooking the response.

“Its job is to get inflation under control, not to ensure a recession doesn’t happen.

“Until we see businesses hit hard enough that they sit bolt upright at the thought of putting prices up, then we won’t see inflation come down, and the Reserve Bank won’t have done its job,” Olsen said.