Recession message finally hits home
We were sheltered from the worst of the pain — perhaps too generously, for too long
Technically, New Zealand might not be in recession anymore. We won’t know until we see GDP figures for the first quarter on June 20. By then we’ll be only 10 days away from the beginning of the third quarter — that’s how backwardlooking the data we use to define recession is.
Regardless, nobody is expecting a return to strong growth; we might bounce in and out of economic contraction over the next few quarters. And of course per capita GDP — given the high net migration gains the country has had — won’t be positive anytime soon.
But in the short term — when it comes to the data the Reserve Bank needs to see for it to feel confident it has inflation on the run — none of those GDP numbers matter as much as how we are all feeling about the economy.
Monetary policy is a blunt tool, which the RBNZ has no choice but to swing across the entire sweep of the economy. It doesn’t want to see the productive sector shutting up shop and contracting.
It’s us, the consumers, who need to put our wallets away. The RBNZ needs regular Kiwis to stop spending and start saving. For that to happen it needs us to feel a bit glum about the economic outlook.
The good news is we are finally feeling bad. The idea that we’re in a recession is finally taking hold throughout the nation.
April’s ANZ-ROY Morgan Consumer Confidence survey, which came out on Friday, shows we’re now nearly as gloomy as we were during the global financial crisis.
It should come as no surprise that Wellingtonians lead the pack as the gloomiest region in that consumer confidence data.
The top-line confidence figure has been falling for a few months now. But ANZ economists had already noted a marked downturn halfway through their March survey when news that we’d officially entered recession broke.
It is all about perception of course. The recession news related to late 2023 — which we had already lived through.
But the bold headlines in mid-march did their job.
It is as if most people need to see the word recession in bold type before they believe it.
For those of us (such as regular readers of this column) who follow the economy like it was a compelling Netflix series, it seems shocking that it has taken so long for the public to get the message.
The Reserve Bank started lifting interest rates nearly three years ago — in October 2021. The story since then has not changed much. But it has taken a long time for higher interest rates to bite.
It is worth noting that consumer confidence did dip lower than it is now when inflation soared in 2021 and 2022. But it bounced as wages caught up with price rises, record migrant arrivals boosted the economy and the previous Government kept spending elevated. Many of us on fixed-term mortgages were also still buffered from the worst of the economic pain in those years.
The confidence dip feels more real now and the recessionary conditions have prompted a mass tightening of belts, more reminiscent of the GFC.
But the GFC — for those who remember how gloomy Kiwis were through 2008 and 2009 — was a different story.
It, too, unfolded slowly at first. New Zealand’s economy rolled merrily on for a year after the first shockwaves of the credit crunch rattled global markets in 2007. It wasn’t until Lehman Brothers collapsed in September 2008 that the financial market meltdown hit the front pages and most Kiwis woke up to the economic crisis.
The RBNZ started to cut interest rates in only July 2008 — from 8.25 per cent.
From there things moved fast. Markets went into free fall and by April 2009 the official cash rate was down to a (then) record low of 2.5 per cent.
The GFC was a big ugly external shock we had no control over and we could all see it was the cause of our misery.
In this economic cycle that shock was the pandemic or, more specifically for the economy, the lockdowns and border closures that were required during the pandemic to limit the spread of Covid-19.
The difference is that governments and central banks all around the world were much more attuned to the initial demand-side shock and moved faster to deliver stimulus.
We were sheltered from the worst of the pain — perhaps too generously, for too long.
Since 2021, I’ve been using a bandaid analogy to describe our choices with regard to rebalancing the economy. There was no way around removing the band-aid.
The monetary supply had to be contracted and inflation had to be tamed.
Some people like to pull the bandaid off slowly, others like to get it over with a short sharp shock. The previous Government was running the slow-pull strategy — less intense pain, but for longer.
The public ran out of patience with that and now we have a government that is — with good cause — pulling the rest of the bandaid off quickly.
I can’t help feeling that New Zealanders have copped the worst of both approaches to band-aid removal.
Anyway, the upshot of all this is that consumers who were already feeling weary and downbeat from the era of high inflation are now hit with the shock of recession and rising unemployment.
People might even be starting to feel more downbeat than they did in the GFC. I don’t think they should.
The macroeconomic numbers aren’t that bad. Unemployment is lower and the recession won’t be as deep as 2009.
But attrition is taking its toll. Finally.
I’m relieved the public is waking up to the economic crunch we’re going through.
Expectations around inflation are falling fast. Still not fast enough, but with enough direction now that we should soon see the end of this long economic grind out of the pandemic era.
● If you have a burning question about the quirks or intricacies of economics, send it to liam. dann@nzherald.co.nz. He’ll try to answer in Inside Economics, a new column published every Wednesday.
It’s us, the consumers, who need to put our wallets away. The RBNZ needs regular Kiwis to stop spending and start saving. For that to happen it needs us to feel a bit glum about the economic outlook.