What is a recession and why should you care?
New Zealand is technically in a recession – but what does that mean and why should you care?
The technical definition of a recession is two quarters of negative growth in gross domestic product (GDP) – the value of all the goods and services made or provided in a country within a particular period.
It is a snapshot of the activity happening in an economy at a point in time. New Zealand ticked that recession box yesterday when data showed GDP fell 12.2 per cent in the June quarter after a 1.6 per cent fall in the March quarter.
So what does a recession mean for an average person? Not a lot, really. No-one’s everyday life changes because GDP has fallen for two quarters in a row.
On some levels, the confirmation of a recession may have an impact on consumer and business confidence. People might be less likely to make big investments with the state of the economy clarified with such a stark term. But ANZ chief economist Sharon Zollner says people already know there is something big going down – ‘‘the economy, mainly’’.
Economist Tony Alexander says anyone who is surprised to hear that activity slowed as the country went into lockdown has been ‘‘under a rock’’.
On the other hand, the reasons that GDP has fallen, and the general contraction in activity, do have a big impact on many people’s lives.
Alexander said what would really make a difference to most people would be the job market.
Those who have secure jobs can ride out a recession relatively unaffected. In some cases, they could even be better off. But it is another story for those who are worried about their work.
‘‘A recession used to mean that house prices will go down – now, well no. It used to mean share prices will get weak – no. This one is a bit unique.’’
Alexander says the recession will mean reduced job security for many people. There are predictions that unemployment will climb to about 8 per cent and remain at high levels for the next couple of years.
The job market tends to lag GDP by about three to six months – in that a drop in activity then leads to job losses and fewer new roles being created.
In this situation, it is possible that the lag may be extended further by the influence of the wage subsidy, which has allowed a number of businesses to continue to employ staff when they would otherwise not have been able to.
In the week to September 4, there were 375,447 jobs still supported by the subsidy in one form or another.
This recession will not last – at least on paper. As soon as the September quarter’s data is released in December, showing GDP growth as a result of the lockdown ending, New Zealand will be out of recession again. But growth could slow again in the early part of next year and another recession is possible.
Zollner says even the September end to this recession will provide no real relief.
Times would be particularly tough for tourism businesses over summer when the normal high season rush did not happen and there was no wage subsidy to cover the blow.
‘‘A recession used to mean that house prices will go down – now, well no.’’
Tony Alexander Economist