We asked twenty economists how they would define a recession in New Zealand

The New Zealand economy was supposedly saved from recession this week, when Statistics NZ revised its economic growth figure for the March quarter upwards by one single basis point. 

When the gross domestic product figures were released that quarter, showing a contraction of 0.1%, it was a quasi-official declaration of recession: two quarters of negative growth. 

Officials warned, at the time of that release, that revisions do occur and, sure enough, when the June data was released the -0.1% result was updated to be -0.007%. 

Since Stats NZ publishes gross domestic product rounded to just one decimal point, the official result was 0.0% and the recession disappeared. 

But if you are willing to delve down to that third decimal place, or simply round to two decimal places at -0.01%, then New Zealand was in recession after all!

Obviously, this is completely absurd. It ignores everything about the economy except for whether its inflation-adjusted aggregate output has shifted one basis point in either direction.

There must be a better way to call a recession. And so, we asked a score of economists to make some suggestions. 

Some Sahm rule 

Most economists who responded to our survey suggested that employment metrics should play a more significant role in determining a recession. 

Michael Reddell, an independent commentator, suggested a version of the Sahm Rule recalibrated for the New Zealand economy. 

This rule says that a recession begins in the United States when the unemployment rate rises 0.5% above the lowest point in 12-months prior.

It was coined in a 2019 paper written by US Federal Reserve economist Claudia Sahm and suggested as a trigger point for fiscal stimulus. 

Several other local economists also said it would be a good marker of a recession beginning, although it is more of an indicator rather than a definition in its own right.

The holy grail

Most economists who responded to our survey suggested adopting a definition and process similar to that used by the National Bureau of Economic Research in the US. 

The NBER is a not-for-profit economic research organisation which has a Business Cycle Dating Committee acting as a quasi-official recession referee. 

While the committee doesn’t have any official authority, it has become the accepted authority on whether or not recession occurred in the US economy.

It defines recession as: “a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in production, employment, real income, and other indicators”. 

It begins when the economy reaches a peak of activity and it ends when the economy has reached its trough. 

Nick Tuffley, the chief economist at ASB, said NBER’s process was “the holy grail” but required them to bide their time before making a pronouncement. 

NBER eventually declared that a recession occurred between February and April in 2020, but didn’t make the call until July 2021.

Broader measures

Eric Crampton, the chief economist at the New Zealand Initiative, said the definition you choose might depend on what purpose you wanted it to serve. 

A more technical option would be to use the output gap, which measures the difference between the actual economic output and the theoretical maximum potential output. 

However, this is based on theoretical models and not something you can observe in the real economy with total certainty.

In 2019, two academics from the University of California suggested the NBER should put more emphasis on increases in economic slack rather than any decline in economic activity. 

Christina and David Romer, who were also on NBER’s committee, said the current definition didn’t distinguish between normal and abnormal movements in the economy. 

For example, Japan’s growth rate hovered near zero for a long period of time during the 2010s. Dipping into negative territory for a couple of quarters was not unusual or noteworthy. 

Focusing more on whether the economy was running below its capacity might also align better with how the public thought about recessions.

Crampton said just switching the current definition to account for population growth would be a better measure of what people were experiencing in the real economy.  

Another possibility would be to factor in the ‘misery index’ which sums inflation and unemployment, he said. 

Fool’s gold

Tuffley said the simplest option would be to define a recession as an annual decline in GDP, rather than just in two quarters. 

Sam Warburton, an economist who has been in the news recently, said coming up with a perfect definition was “a fool's errand”. 

"In keeping with what people worry most about, and what is a core component of economic activity, a reasonable guide is whether unemployment and labour under-utilisation trending up by more than a blip,” he said. 

Miles Workman, a senior economist at ANZ, said the recent ‘technical recessions’ hadn’t been consistent with typical recessionary conditions such as widespread unemployment. 

Economic activity and employment have both climbed significantly since the pandemic hit, and are only falling from high levels. 

He said the key ingredients for assessing recessionary conditions should include broad-based economic activity, inflation-adjusted income, and the unemployment rate. 

But any other data points relevant to each unique set of economic conditions should also be added to the mix.

“In other words, the definition of a genuine recession should probably have some qualitative element to it, as a ‘technical recession’ doesn’t always signal a weak economic underbelly,” he said. 

If we try to take all of these suggestions and synthesise them into a list, you might get something that looks like this: 

• A broad and prolonged decline in economic activity per capita, that is below trend
• More than half a percentage point increase in the unemployment rate, and/or other signs of slack in the labour market
• Falling real wages or household income
• Decreased sales in retail and/or output in manufacturing industries
• Some subjective assessment and contextualisation of these conditions

It's not such an easy soundbite and cannot create a headline after each GDP data release, but would be a more resilient and meaningful description of economic conditions. 

Economic institutions, financial media, or even Government agencies could be tasked with assessing conditions against this criteria and declaring a recession. 

No such thing as a fish

Or perhaps not. Craig Renney, an economist at the Council of Trade Unions, said there wasn’t an obvious need to have any definition at all. 

“Calling a recession doesn’t help us understand anything, nor does it provide any new policy tools to deal with economic problems,” he said. 

He gave an example of an economic boom in the United Kingdom during the 1980s, during which London grew enough to prop up GDP while the rest of the country languished. 

“We didn’t call it a recession because GDP rose consistently. But it certainly was one of the biggest economic depressions in European history at the same time”. 

If we insist on calling recessions, he suggested using the Sahm Rule as it focused on employment — which was more closely linked to wellbeing than other measures. 

Mike Jones, the chief economist at BNZ, agreed it was more important to contextualise each ‘recession’ rather than coming up with an entirely new definition. 

“Whichever individual measure we choose as the best representative of the economic conditions we’re facing, we’ll always need to look at a range of other measures for context”. 

Every economic cycle will impact different people, businesses, sectors, and regions, and the relevant context will change as well. 

Right now, New Zealand has narrowly avoided a technical recession but consumer confidence is still at low levels, household and primary sector incomes are under pressure, and production indicators are negative.