Economic activity per person in New Zealand has now been in decline for over a year and headline growth has been well below trend, despite the booming population.
Late last year, we attempted to come up with a better definition of recession as an alternative to the politics-fueled bickering about two quarters of negative growth.
The data looks much more clear cut now. Gross domestic product growth over the past year has been just 0.6%, fathoms below the historical average of 2.5%.
If you then strip out the boost from strong population growth, you find each person’s slice of the economy has contracted by 3.1% and purchasing power has fallen 4.8%.
The unemployment rate has lifted 0.6% in the past year, which might not meet NZ’s version of the Sahm Rule but is clearly pointing in that direction.
Retail trade and manufacturing output both looked bad in the GDP data with 3.5% and 5.2% falls in the past year.
The only recession metric which may not have been met is a decline in real wages. Most wage measures showed an increase in 2023 that was greater than the 4.7% inflation rate.
However, BNZ economist Doug Steel said it was clear from the GDP data that there was a serious squeeze on real incomes.
“In fact, broader measures of income look even worse than GDP itself,” he said.
Real Gross National Disposable Income (RGNDI) is a measure of total purchasing power and it fell 2% in the last three months of 2023 alone.
“The peak-to-trough now decline in RGNDI has accumulated to 6.1%, which is now more than the peak to trough on this measure during the GFC,” Steel said.
It is very clear now that the economy has fallen deep into some sort of recession.
What’s hurting?
Statistics NZ data showed the biggest weakness in the December quarter was a sharp decrease in inventory levels.
Infometrics chief forecaster Gareth Kiernan said this was due to the distribution sector selling down the high levels of stock they were holding during the pandemic.
This also resulted in import volumes falling by similar amounts as distributors chose not to restock the sold inventory and households demanded less goods.
Spending on things such as alcohol, clothing, communications, and restaurants has some of the biggest falls since 1992, excluding the lockdown periods.
Consumption spending per person has dropped 2.5% over the past year. Again, that is the largest year-end decline in the past three decades.
Where to from here?
Finance Minister Nicola Willis was colloquially in charge of the economy for one of the three months covered by this data release.
She said in a statement it showed the importance of cutting government spending and finding ways to drive more economic growth.
“It is concerning that we are in recession even despite our rapidly growing population. This simply reinforces that our approach to strengthening and growing the economy is the right one”.
Craig Renney, chief economist at the Council of Trade Unions, reached almost the opposite conclusion from the same data: the Government should be making more investments.
Growth in New Zealand and the United Kingdom was falling behind countries like Australia and the United States, which had stronger economic plans.
“Those countries with an active economic plan based on investment—like the US—are seeing strong economic growth and employment growth. This government is heading in the opposite economic direction,” he said.
International Monetary Fund staff recently visited New Zealand for an annual check up on the economy and to provide some high level advice to policymakers.
Mission chief Evan Papageorgiou said the Coalition Government’s plan to pull back on spending was the right move, despite the lack of economic growth.
Addressing the structural fiscal issues would not necessarily worsen the downturn as it could “create its own momentum” by contributing to an earlier easing of interest rates.
In that sense, the economy is only running slowly because of restrictive monetary policy and it should return to its historical growth rate once interest rates normalise.
Stimulating the economy at this stage may just delay or draw out the recovery. It could be better to keep some fiscal powder dry for when the Reserve Bank gives growth the green light, through interest rate cuts.
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