● Liam Dann
The economic fallout from coronavirus has people talking about recession risk . . . again. We haven’t had a recession in New Zealand for almost 11 years.
The period since March 2009 is now the second longest period of economic growth in our post-war history.
That’s good.
But it also means there’s a lot of Kiwis in the workforce now who don’t know what it is like when the economy slams into reverse. Could we cope?
First, it’s important to pause and emphasise that, while the recession is a risk, it is still highly unlikely.
It’s not the base case for economists assessing coronavirus impact.
The spread of the epidemic would have to take a material turn for the worse to change that assessment.
But the spectre of drought hanging over much of New Zealand right now adds another layer of risk to the outlook
It was drought that tipped us into our last recession, just before the global financial crisis hit in 2008.
The New Zealand economy is so reliant on the primary sector that when drought arrives in tandem with a global economic downturn we have big problems.
The possible double-whammy was enough to have the likes of BNZ chief economist Stephen Toplis talking, very cautiously, about recession last week .
His words were: “plausible, not probable, yet”.
We need to keep it in perspective, but it isn’t easy.
For a long period, New Zealand slipped into a recession every six or seven years.
That’s created a somewhat fatalistic economic outlook, which still persists in older generations.
Conversely, after such a long run of growth, it is easy to get complacent and start to think these things can never happen.
In a serious recession, consumers and businesses close their wallets on non-essential spending very fast.
That exacerbates the downturn and things can spiral downwards.
Suddenly cash is king. Businesses with low cashflow and/or high debt levels can get caught high and dry.
Or, as the wily old investor Warren Buffett said: “You never know who’s swimming naked until the tide goes out.”
So, how do we define recessions, then?
An easy technical definition is: two consecutive quarters of negative economic growth.
But that’s just a rule of thumb. Fundamentally they are about economies going backwards.
In the US there is a committee at the National Bureau of Economic Research that officially declares a recession once it is satisfied it meets key criteria.
In New Zealand it’s less formalised. It should be down to the Treasury or the Reserve Bank, but in reality would likely be called first by the media or opposition politicians.
A 2014 research paper produced by Reserve Bank head of economics John McDermott and Victoria
University professor Viv Hall used a more qualitative approach when it analysed New Zealand’s track record of economic booms and recessions.
It identified the period between 1952 and 1966 — often recalled very fondly by baby-boomers — as our longest boom.
It was also our strongest period of real wealth creation, with GDP growing by 86 per cent across 58 quarters.
By comparison we’ve now had 43 quarters of growth since the last recession ended in March 2009.
But it has been shallow and slow, with GDP growth of around 40 per cent.
A growth period between 1998 and 2007 achieved 41 per cent GDP growth in just 39 quarters.
Since the GFC we’ve become accustomed to constant but relatively undynamic, low-level economic growth.
Where it has been accelerated, its been largely due to immigration and population growth.
It was evident from all the business gloom last year that our tolerance for a serious recessionary shock is low. That was really just a mild slowdown in the growth rate.
I’m not saying we’ve all turned into a bunch of snowflakes.
There are some structural reasons why doing business might be tougher now.
Inflation has been low for a long time but fixed costs like rent and power have risen disproportionately. That’s squeezed margins for many firms.
Then there’s online competition — which puts local businesses up against previously distant global competitors.
It’s near impossible to put your prices up when your up against the lowest-cost operator in the world who can advertise directly to potential customer through Facebook or Youtube.
On the flip-side the local economy is structurally a more robust now than it once was.
Low interest rates mean debt isn’t quite the terrifying burden it once was, inflation and unemployment are low. The Crown accounts are in much better shape, so the Government can spend and stimulate the economy through a downturn.
We are, on paper at least, in good shape to ride out this rocky start to 2020.
I don’t think we’ll see a recession this year. I hope we see the coronavirus outbreak continuing to ease and China’s economy bouncing back quickly. I hope we get some rain.
If neither happens soon I think New Zealand should be strong enough to hold its course through a short technical recession. But it won’t be much fun.