Five things to know about GDP and the recession
Thursday, 21 March 2024
Stats NZ released the latest gross domestic product (GDP) data on Thursday, showing that the economy shrank by 0.1% in the December quarter.
Because that followed a 0.3% drop in the September quarter, it means that the country was back in a technical recession through the latter half of last year.
But what does that mean, and why does it matter?
What’s a recession, anyway?
Broadly, a recession is a period of economic decline.
The United States has a group of economists who declare the country is in a recession when they see a significant drop in economic activity lasting more than a few months.
In New Zealand, many people rely on the definition of two quarters of falling GDP.
Why is it happening?
A large part of this recession is because the Reserve Bank needed us to have one, to try to get inflation under control.
It has been hiking the official cash rate to slow down spending, both from households and businesses.
As ANZ economists said on Thursday: “New Zealand was in a technical recession at the end of 2023, but this isn’t your run-of-the-mill run-for-the-hills recession that we’ve seen through times of financial market and economic crisis.
“Rather, it’s a policy-induced slowdown that’s part of the necessary transition from too much fiscal and monetary stimulus in the wake of the pandemic. ‘Least regrets’ macro stimulus was appropriate at the time, but that doesn’t mean it was costless – this is what paying the piper looks like, and if we don’t pay up, the inflation rats will take over the whole economy.”
Is this good news, then?
Maybe. The Reserve Bank had expected a reading more like zero in the quarter, so things are a bit softer than it was expecting.
Westpac senior economist Michael Gordon said the 3.1% that the economy has dropped year-on-year on a per capita basis is sharp, compared to history.
“But in this case it highlights the degree to which the economy had become overheated in the first place.
“On balance, today’s report suggests slightly less need to keep monetary policy tight for an extended period. That said, the scale of the surprise for the Reserve Bank is less than we saw in the September 2023 release, which the Reserve Bank has tended to downplay. There is also a lot of water still to go under the bridge before the May monetary policy statement.”
Nathaniel Keall at ASB said the result tilted the balance in favour of OCR cuts sooner than the mid-2025 the Reserve Bank had signalled. ASB still expects them in the second half of this year.
Does it feel a bit worse than a 0.1% drop?
New Zealand has had a huge surge of migrants over the past year-and-a-bit. Despite the population growing by 130,000 migrants in the year to January, the GDP managed to contract anyway.
There’s a smaller economy to go around, and a lot more people in it, which might make the downturn feel more significant than the stats indicate.
On a per capita basis, GDP decreased by 0.7%.
How long will it be before things improve?
ANZ said it expected the slowdown to level out mid this year, at which point the “million-dollar question” would be whether it had been enough to bring inflation into target.
For households, that will be the big question
Things will probably start to look up when interest rates soften again. Economists generally think we are now at the peak, but how quickly the Reserve Bank can cut the official cash rate relies a lot on that inflation track.
Keall said there could be wider changes required.
“Since mid-2022 the economy has experienced a sizeable deterioration in momentum that has erased most of the initial strength of the early post-COVID recovery. Economists and policymakers need to think seriously about how to boost productivity and get the NZ economy out of the whole it is in, or we will all be the poorer for it.”