Why did the RBNZ say the recession was over?
Posted on: December 8, 2008
A lot of people appear to be discussing the RBNZ’s call that the New Zealand recession is over (here, here, and here).
Now I have to admit that I do not find his call ridiculous for a few reasons:
- Part of his job is to prevent wholesale declines in consumer and business confidence – as a result he has to be relatively positive (although not unrealistic)
- The Bank has slashed interest rates and says it will continue to do so to support economic activity – as a result he is really saying “as a result of our actions the recession in NZ is over
- We have just come out of a drought and moved away from record petrol prices – as a result our economy is also experiencing two positive shocks as well as the myriad of problems. If we had not had a drought, I have no doubt that we wouldn’t have had a recession earlier in the year and we would have experienced a “technical” one now – even though we are in a better situation.
Think of the third point this way. A drought might knock activity down by 1% from where it would have been. Coming out of the drought, activity should rise 1%. The RBNZ is saying that the current slowdown will cancel out this increase – it is not saying that we are back to normal (which would involve a jump back to trend growth).
Overall, I would guess that interest rates will take too long to have an impact, especially with the dysfunction in credit markets, and we will have a sharp contraction in March – but if we have a positive December (which is likely with collapsing fuel prices) Alan Bollard will still be right, the technical recession would have finished in September!
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11 Responses to "Why did the RBNZ say the recession was over?"
December 8, 2008 at 12:49 pm
“Does it matter that most of the east coast of both islands is heading for another drought and commodity prices are falling fast (though the drop in the value of the dollar is softening the impact of that)?”
Indeed it does … the Reserve Bank has assumed that the first doesn’t happen, and that the second happens to a degree. Given their assumptions we wouldn’t see a “technical recession” next year.
I am concerned about a second drought as well – it definitely isn’t looking good. Another drought would mean that we face a very, very, bad March quarter 😦
On the commodity price side though, it is important to note that New Zealand dollar commodity prices are actually still at record highs – and even world dairy prices have only come back to their 2006 levels. Hopefully there is a bit more support for our commodity prices in the short term 🙂
December 8, 2008 at 1:13 pm
I thought the informal rule was that you needed two consecutive quarters of positive growth to end a recession so a positive December by itself would not do it. Not that there is any official recession definition in NZ anyway.
December 8, 2008 at 1:15 pm
“I thought the informal rule was that you needed two consecutive quarters of positive growth to end a recession so a positive December by itself would not do it.”
Ahhh very interesting – I don’t think I’ve seen that before. If that is the case we expect a recession until about September next year don’t we 😛
December 8, 2008 at 1:45 pm
Please correct me if I am wrong, but with a projected drought would that not drive up the price of affected commodities?
My thought is that with an expectation for a lower yield that the demand would stay current and drive up the price.
December 8, 2008 at 2:02 pm
“Please correct me if I am wrong, but with a projected drought would that not drive up the price of affected commodities?
My thought is that with an expectation for a lower yield that the demand would stay current and drive up the price.”
It depends how much of the supply little old New Zealand makes up. We are constantly told that we supply 50% of global lamb exports – but even so exported lamb only makes up a tiny proportion of a countries meat production (especially since intra-EU trade is counted as internal).
As a result the price effect would be small.
Also, even if a drought here did drive up commodity prices this will not compensate for the drought.
GDP is based on the “volume” of production – not the change in prices. A lift in commodity prices does not increase GDP from agriculture – it has to come in through consumption. As a result, a lift in commodity prices would dampen the hit to consumption from the drought – it wouldn’t prevent the knock to agricultural volumes that we saw in the March 2007 numbers.
December 8, 2008 at 2:02 pm
As far as I know, there is no “official” definition of a recession anywhere. The “two quarters of GDP decline” idea is commonly used in the media.
The arbiter of economic cycles in the US is the National Bureau of Economic Research, which despite its official sounding name is simply a private group of economic researchers, albeit very good ones.
The NBER has kept records of economic cycles in the US for many years (http://wwwdev.nber.org/cycles/cyclesmain.html)
and its high-powered Business Cycle Dating Committee makes pronouncements of the timing of the start and end of each cycle. They do this by announcing a peak (the end of an expansion) and a trough (the end of a period of decline). They do not use GDP as their sole indicator, but uses a range of indicators.
They have most recently declared December 2007 as a peak time of economic activity, meaning that the expansion ended at that point.
December 8, 2008 at 3:38 pm
“They have most recently declared December 2007 as a peak time of economic activity, meaning that the expansion ended at that point.”
Do you think we need a similar body of private sectors economists in New Zealand that call recessions? Given our small size it would be best to associate it with one of the universities methinks
December 8, 2008 at 5:16 pm
Since such information is probably only useful if you are planning to run counter-cyclical monetary and fiscal policy, i would be loath to have anyone calluing whether we are in a recession or not.
December 8, 2008 at 6:43 pm
Recession/no recession is too discrete. I don’t think we should encourage anyone to exaggerate the importance of any particular definition for policy purposes or otherwise. But accepting the “negative GDP” definition, I will be very surprised if Dr Bollard is right. In fact, unfortunately i think that the recession is really only beginning to get going.
December 9, 2008 at 12:07 pm
“Since such information is probably only useful if you are planning to run counter-cyclical monetary and fiscal policy, i would be loath to have anyone calluing whether we are in a recession or not.”
Very true 😛
“Recession/no recession is too discrete. I don’t think we should encourage anyone to exaggerate the importance of any particular definition for policy purposes or otherwise”
Indeed – after all if we have negative GDP growth because of a permanent supply shock the policy prescription should be different to a temporary demand shock.
“I will be very surprised if Dr Bollard is right. In fact, unfortunately i think that the recession is really only beginning to get going.”
Potentially, like you have been saying the key appears to be the world outlook.
However, I would like to see what has happened to domestic savings this year before trying to argue with him – if domestic savings has improved markedly, and if commodity prices don’t fall through the floor (which even now they have not – they have just fallen a long way 😛 ), then the idea of a long period of stagnant growth and a robust recovery is not unconscionable
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December 8, 2008 at 12:35 pm
Does it matter that most of the east coast of both islands is heading for another drought and commodity prices are falling fast (though the drop in the value of the dollar is softening the impact of that)?