The visible hand in economics

Is New Zealand heading for a recession?

Posted on: September 12, 2007

Well of course it is, a recession is a typical part of a business cycle and we need one to help our economy achieve some balance.

Now that I have provided my conclusion, let me meat it out a little bit.  By recession I am thinking that NZ is going to have a growth recession (at least two quarters of close to zero growth (seasonally adjusted)).  A number of other economists (namely NZIER and ANZ economists) believe we are going to have a full blown recession.

Many people out in the community are scared of a recession, they think that it means the economy will fall in on itself and that the unemployment rate will fly into double figures.  However, if that was the case we would be predicting a depression not a recession.  Many of the doomsayers out their use the term recession thinking that it implies negative annual economic growth and double digit inflation, however that would be a depression.

The reason for economists confidence is the strong position of NZ’s terms of trade, which implies we can buy more goods than ever (well post mid-70’s anyway) with the bundle of commodities we make in NZ.  The reason we still expect a recession is that our economy is highly unbalanced, with strong asset price (namely house price) growth, high levels of consumer debt (which in turn feeds into a huge balance of payments deficit), hefty pipeline inflationary pressures, and poor productivity growth.

A year or so of poor economic growth will not see unemployment fly upwards (it is extremely likely that it will not cross 5%), but it will help the economy catch its breath.

One important question does appear to be unanswered though, are the current imbalances the result of a long business cycle, or are there structural deficiencies in the New Zealand economy?  This is the question we should be concerned about, not whether New Zealand is going to have a little old recession.

Note:  You might wonder why I did not mention the finance companies in my discussion.  Well they were imbalanced, and now a whole lot of the unstable ones have gone done.  There might be a short term panic by people, but hopefully in the long run this will just make people take account of risk.

1 Response to "Is New Zealand heading for a recession?"

I’m unconvinced that we ever “need” a recession. Krugman is quite good on this:

Given the inflation situation, it’s possible that monetary policy will need to be tight for some time, but there’s no reason that we can’t have rebalancing, housing correction, and a reduction in inflation pressures without the economy slowing more than it already has.

We’ve already had one “growth” recession in 2005 q3-4 – heck, it was about 0.1 percentage points away from being a real recession. It didn’t exactly help rebalancing much (OTOH, it didn’t hurt the household sector much either).

Growth has basically averaged 2% over the last two years. That’s slow already. I wouldn’t expect it to be noticeably different from that over the next year, although a large change in composition (exports instead of consumption) may certainly change the way the public perceives the economy.

I’d answer your important question with a bit of a), a bit of b), and a bit of c) blaming someone else: our imbalances are partly the result of being out of sync with global growth, the large global savings imbalance, and Japan’s super loose monetary policy.

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