We’re headed for recession – technical or otherwise
This opinion piece was first published in The Post on 12 June 2023.
Economists are divided on whether GDP data for the March quarter, to be published this week, will show New Zealand in a recession or not. After a 0.6% contraction in the December 2022 quarter, another negative result would meet the technical definition of a recession, being two consecutive quarters of negative growth. But it makes little difference whether the March result is +0.1% or -0.1%: New Zealand is in a phase of much tougher economic conditions after the stimulus-fuelled boom during the COVID-19 pandemic.
Canvassing eight sets of economic forecasts shows an expectation of New Zealand’s GDP growth averaging less than 0.2% per quarter between the end of 2022 and mid-2024. Excluding the lockdown-affected June 2020 quarter, this stretch of stagnation would be the weakest 18-month run since the Global Financial Crisis in 2008/09. Because it comes after a period of particularly strong demand – except for the tourism and hospitality businesses most heavily affected by the border closures – the change in conditions is that much starker.
The retail sector is among the areas being most heavily squeezed. Core retail sales volumes, which exclude fuel and automotive retailing and adjust for inflation, have fallen 4.6% since the end of 2021. The pandemic spending binge on DIY supplies, homewares, and electronics has ended, contributing significantly to the slowdown. But interestingly, the total value of core retail sales has risen 7.1% since the end of 2021 as inflation has accelerated. Far from mortgage rate rises having massively hit household budgets so far yet, it instead looks like the volume of retail spending has been undermined by strong inflation, with people getting less bang for their buck at the shops because everything is costing more. Higher mortgage rates require lots more cash to meet payments now, but if households are still spending more money overall, either those mortgage hits haven’t fully surfaced yet, or they might not be as critical as we’ve been led to believe.
Yet the extent of the downturn feels more amplified when we look at other indicators of domestic economic activity. After growing by an astounding 23% between March 2019 and March 2022, government consumption spending has shifted into reverse over the last year, as pandemic spending has wound down. Putting aside debates about the appropriateness and efficacy of some of the government’s spending, this shift is taking a lot of momentum out of the economy. Even with the recent Budget’s $9.4b increase in spending compared with previous forecasts, government demand will be a much less prominent feature of economic activity over the next couple of years.
The outlook from the business sector is no more encouraging. ANZ’s Business Outlook shows that investment intentions have been below their long-term average since the end of 2021 and, in line with the survey, private investment spending stagnated during 2022. Residential construction activity is quickly retreating from its record highs, and expectations of commercial construction have also softened over the last 6-9 months.
Even looking towards the export sector to save us might be wishful thinking. Tourism is an obvious area of growth as it recovers from the restrictions imposed during the pandemic, but the recovery in visitor arrivals seem to have plateaued at about two-thirds of pre-COVID numbers over the last six months. Higher airline ticket prices combined with a weak world economy will further recovery in the tourism sector that much harder to achieve.
Outside of tourism, the sluggish global economy is also weighing on prices for many of New Zealand’s key export earners, including dairy and forestry. Not only are prices being undermined by softer demand, but input costs for the agricultural sector have also risen substantially. Increased considerations of environmental costs, although necessary to improve sustainability, are also hitting production volumes and limiting growth in both export volumes and revenue.
Perhaps if there’s going to be one thing that keeps New Zealand out of a technical recession in 2023 and 2024, it will be migration. Annual population growth looks likely to be well above 2% this year, which was the rate maintained on average between 2014 and 2019, helping to fuel economic growth of 3.5%pa during the second half of last decade. Put another way, it’s pretty hard for the economy to shrink for six months in a row if the population grows by 1% during that time.
If we’re honest, though, keeping our headline GDP results in positive territory by simply adding more people to the mix is one of the least satisfying kinds of growth. For example, if both economic and population growth are running at 2%pa it means that per-capita growth is zero and, in real terms, we’re only standing still.
Looking back over the last 30 years, New Zealand has averaged per-capita growth of 1.8%pa, and there have only been three occasions when per-capita growth has turned negative: the Asian Financial Crisis in the late 1990s, the Global Financial Crisis in 2008/09, and the lockdown-affected period in 2020/21. Based on current forecasts, per-capita outcomes over the next year could be almost as bad as the Global Financial Crisis. Technically, it might not be a recession, but it doesn’t get much worse.
More limited investment, and sales that only rise as more people come into the country, isn’t a sustainable pathway for the economy. In the short term, it’s probably the best we can do given the need to rebalance the economy after the large amount of stimulus during the pandemic. It might sound cliched, but going forward, it’s clear we need to focus on working smarter, not harder.