Much ink was spilled debating the condition of the New Zealand economy in the run up to the October 14 election. Now that it has passed, some of the political heat has dissipated.
During the argument, we wrote an article asking if there could be a better definition of recession and proposed a checklist that could be used.
Now that we have the labour market data for the third quarter we can have another look at the list and see how we are tracking against it.
- A widespread and enduring decline in overall economic activity
The New Zealand economy grew by about 1.8% in the year ended June, which is the most recent data available — since gross domestic product data takes months to be released.
A 1.8% growth rate is considerably slower than the country's historical average of about 2.5% and was partly driven by a high level of net migration.
NZ’s population has grown by about 2.1% during that same period, which more or less cancels out any increase in economic activity per person.
Economists think GDP growth in the September quarter will be slow (estimates range from -0.3% to +0.4%) while the population continues to expand. This will only make these numbers look even worse.
So, while overall economic activity has been expanding, it has also been below trend and negative per capita for an entire year. On balance, we can give this box a cautious check.
- An increase in unemployment rates or a decline in other employment measures
The unemployment rate increased to 3.9% in the September quarter, up from a record low of 3.2% one year ago. That 0.7 percentage point increase more than meets the Sahm Rule.
However, 3.2% was an historically low rate and the Sahm Rule has been calibrated to signal a recession in the United States. Unemployment remains low in New Zealand, but it is rising.
Other employment measures are also weakening. The underutilisation rate has increased from 8.9% to 10.4% over the past 12 months, and wage growth has slowed.
There has definitely been a notable loosening of the labour market, albeit from record tightness. This box gets another check mark.
- A significant decrease in confidence among both consumers and businesses
Business confidence has bounced back into positive territory after the success of the National Party in the October election.
While the exact shape of the National-led government is still being worked out behind the scenes, business leaders already like what they cannot see.
ANZ’s outlook survey showed business confidence jumped 21 points to +23 in October and businesses’ expected own activity rose 12 points to +23.
Own activity is the measure economists pay more attention to, since the headline confidence is enormously swayed by political preferences.
That measure had already been climbing throughout 2023 and had turned positive sometime in the middle of the year, prior to the election.
ANZ–Roy Morgan’s consumer confidence survey also showed some improvement, with a two point lift in October to a still negative 88.1 index level.
That said, the future conditions index tipped over into positive territory with a six point increase bringing it to 100.9. This doesn’t get a check, confidence is okay.
- A substantial drop in industrial production and manufacturing activities
BNZ–BusinessNZ’s Performance of Manufacturing Index (PMI) fell further into contraction during September and output has been shrinking for seven months.
An index reading above 50 indicates that manufacturing was generally expanding, and below that means it has been declining.
The PMI dropped to 45.3 in September, the lowest activity level since 2009 (excluding the Covid lockdown months) and well below the long-term average of almost 53.
However, New Zealand’s services sector has been performing a little better. It returned to an expansionary 50.7 in September, according to the Performance of Services Index (PSI).
It was the end of three consecutive months of decline, although still below the long-term average of 53.5 for the survey. This one gets a half check.
- A decline in real incomes for individuals and households
It is surprisingly hard to calculate changes to real incomes in New Zealand.
Statistics NZ says the Labour Cost Index (LCI) is commonly compared to the Consumer Price Index (CPI), although neither will marry up with household incomes and costs exactly.
Let’s use it as our yardstick, anyway. Annual inflation, as measured by the CPI, was 5.6% in September, while wages, as measured by the LCI, were up 4.3% — a 1.3% decline in real pay.
This suggests that real incomes have declined over the past year, although there is some doubt about how accurately LCI is measuring how much people are earning.
For example, the Household Labour Force Survey said the median weekly income from wages and salaries increased by 7.1% in the year ended June, when the annual inflation rate was 6%.
Treasury forecast a 6.9% increase in hourly wages against a 6% inflation rate for 2023 in its pre-election economic and fiscal update. That would mean an increase in real wages.
We can give this one half a check since LCI is the preferred measure and it has been lagging inflation quite seriously.
Overall verdict
This checklist gives us a ‘recession score’ of 3/5, which is definitely more recessionary than not. However, unemployment remains low and aggregate economic activity has increased.
Those are the two most important measures of the economy, but employment has started to slip and GDP has been bolstered by population growth.
Perhaps it is best to say that New Zealand is flirting with recession, but not yet fully in one.
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