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.
73 Comments
I wouldn't call it shallow, as it has some truth. Both internal and external factors have led us to this point. It can easily be argued that had we not borrowed to fund the covid payments then we would be in a bad recession already with failed businesses and job losses en masse, or that the RBNZ's removal of LVR limits, LSAP and FLP juicing the economy had a large surge n economic activity which allowed a mass transit of wealth upwards in society, or that the implementation of costly health reforms within this environment played into it also. Sure the price of fuel flows into goods and services, and the weather in the north island last summer added to the cost of living too, but it would be baseless to say that the main cause of where we are at is predominantly external.
Our local actions cause us to oscillate around the trend line but that line is set by the Fed. Plot the Fed rate against the NZ OCR and all the trends are the same. So we can make it locally better or worse but have little impact on the big picture. On a global level, NZ's impact is noise.
What nonsense. Golly a lot of crap gets posted in these comments.
If what you said was correct then the Singapore, Japanese, Korean and Chinese 'economic miracles' would never have occurred.
And all these countries, when they started, came off bases way, way lower than where NZ was at the same points in time.
(I could add Eire to the list but their miracle was largely forced upon them by external actors rather than them doing anything much for themselves. I'm sure there are others I could add to the list but these five are the only ones I've studied in some detail.)
re ... "Shallow thinking Yvil. The coming recession is globally-driven and there is zero NZ can do to change that."
Shallow thinking kiwimm. Are you saying that when some economies go into a recession all other economies do to?
Many economies don't enter recession just because some do. Even when major ones like the USA enters a recession many just keep trucking along.
Further, there is much NZ can do to prevent it. Will we? Maybe. But with our current political leadership? Maybe not.
But I'm of the view that maybe the RBNZ is far smarter. We'll see.
You misunderstand me - probably my fault for not explaining more clearly.
All countries are part of a global financial system and global financial cycles - the trend line. Each country can make decisions to move themselves above or below the trend line so can experience different outcomes but not massively different. Some countries may be able to raise GDP faster due to productivity gains which means they grow while others are in a mild recession, or grow quickly while others grow slower. However, every so often a global event comes along whose magnitude is larger than local variance so impacts everyone. Examples of this are the GFC and a sharp rise in reserve currency inflation.
Analogy: all countries are ocean swimmers who are swimming through tides. Some may be strong enough to swim against a gentle tide and avoid going backwards. If the tide becomes strong enough then, no matter how hard they swim, they are going backwards.
re ... "Replace him with someone else and they would largely make the same decisions."
You sure about that? Many I know would not have reduced the OCR to near zero in the face of massive supply disruptions. Economics 101.
I, and many others, would really really like to see a transcript of how the RBNZ's MPC concluded that that was ever a good idea. Ditto suspending LVR regulations. Ditto throwing massive amounts of cheap money at the banks. I'm particularly interested in where the information came from they gave weight to (banks?) and why they thought NZ's government wasn't doing enough.
Oh, and as an aside, we could replace him with one of the other central bankers that didn't make the same decisions and now have far lower inflation as a result.
Orr had no choice but to cut the OCR to 0%, Kiwi would have rallied if he didn't. The LSAP however, that just does not get enough coverage as the single largest loss in Kiwi history. It will cost us near on $15bn, $3,000 for every single one of us. Imagine what could be done with that
What makes you say, "Orr had no choice but to cut the OCR to 0%, Kiwi would have rallied if he didn't."? What makes you believe that the Kiwi would have rallied? The Kiwi is hardly a reserve currency. And even a small drop would have sent the message.
Lots of other central banker dropped by far, far less. (Mainly, the same central bankers who haven't need large rises to squash inflation as it turns out.)
The other central bankers faced the same issue.
There you go again ... I'll repost the same answer as above ...
What nonsense. Golly a lot of crap gets posted in these comments.
If what you said was correct then the Singapore, Japanese, Korean and Chinese 'economic miracles' would never have occurred.
And all these countries, when they started, came off bases way, way lower than where NZ was at the same points in time.
(I could add Eire to the list but their miracle was largely forced upon them by external actors rather than them doing anything much for themselves. I'm sure there are others I could add to the list but these five are the only ones I've studied in some detail.)
I believe that it's monetary expansion and runaway depreciation of fiat currency (backed by nothing...). Unfortunately, wages fail to go up accordingly and the right wing moan that it is already the cause of inflation, which is a joke. Maybe CEO salaries and sports "legends" aside. Parasitic passive incomes such as rent seeking and investment in artwork and the like will eventually destroy society. The alternative would be a fairer system based on a pegged currency but that just won't happen this side of a revolt.
Whether you use the LCI median, average, what not, you need to remember if wages increase 4% p.a., that's gross wages, where realistically the CPI is "net" from the consumers perspective, so for the consumer/public wage growth to expand to keep pace with the cost of living it would need to exceed the CPI (or what ever index of costs you want to use), to accommodate for taxation.
From that simple perspective, the consumer has been in recession for a while.
No not really, well assuming a flat rate of taxation at least or if the brackets are adjusted for inflation, which I know they are not but should be.
If you earn x * (1 - tax) and you get a y increase that is the same percentage increase before tax as after tax.
increase before tax y*x/x, increase after tax y*x(1-tax)/x(1-tax) both increases are y.
In the last 37 years (at least), the only time the unadjusted unemployment rate has gone up by more than 0.5 percentage points in 12 months without a technical recession was after the Chch earthquake. Treasury and RBNZ are forecasting that we will see a full one percentage point year-on-year increase in Q2 of 2024. I agree - although if the next release goes above 4, we could get there in Q1 of 2024 (we would need to hit 4.6% unadjusted).
Bizarrely, Treasury made that unemployment rate forecast in the same pre-election briefing that they predicted NZ would avoid a recession. I have literally no idea how they could say that with a straight face. When we do go into recession (and we will) someone should be squirming in their seat trying to explain how they tortured the data to get Grant the answer he wanted.
Now, I look at a lot of leading indicators because I am a sad old man - Stats NZ activity index, card spending, benefit numbers, net flow from work to benefits, net new loans, real wage growth, manufacturing index, corporate tax take, net govt spending, labour market by age / place / industry etc etc... *Everything* is flashing red and has been for ages. The burst of inward migration gave us a dead cat bounce.
What people often miss is that high employment and economic growth rely on new money flowing into the economy from either (a) net increases in private sector borrowing (banks create new money), (b) Govt spending more than it taxes (Govt creates new money), or (c) people spending down their NZ dollar savings (domestic or overseas). The flow of money into the economy is currently *negative*, and, again, that only happens when we are barreling headfirst into a recession.
In a few years time, there will be papers published about how NZ got the post-COVID era so spectacularly wrong. We will become a case study of what not to do.
and they voted for a more left leaning government, wellington was the only place where the left vote held up, yet when the public service had whom most wanted in charge could not deliver in fact did an even worse job of delivery so only have themselves to blame and wonder why the rest of the country voted for a slash in their numbers and targets being brought back
This link is a long, technical post that is reinforcing everything Jfoe is saying When the Bough Breaks - Hussman Funds. All lights are flashing red.
Bubble extremes lead investors to forget history. Investors look back on the advance of the preceding years, and see only that high valuations were followed by even higher valuations; that every setback was followed by a resumption of glorious returns. They conclude that valuations are worthless. They imagine that the returns they enjoyed from the point of rich valuations to the point of extreme valuations are actually returns that they will keep over the complete cycle. Worse, like economist Irving Fisher catastrophically proposed in 1929, many investors insist that market cycles no longer exist, and that valuations will maintain a “permanently high plateau
That's a great question.
Our economy basically consumes energy, imports, and labour to ensure that we (unevenly) meet the needs of our population, while supporting the increasingly unequal accumulation of financial and non-financial wealth. The New Zealand economy is a polluting, poverty-creating, ponzi scheme.
What is so frustrating is that we have everything we need to become a far more self-sufficient and sustainable economy, and, as a result to become a much better / happier place to live. But, our strategic focus is not on our people, it is on keeping the ponzi going - pretending that if we pump enough credit money through the economy and into the assets owned by the top few per cent, that somehow we will reach nirvana.
I hold out hope that I will live to see a politician explain clearly to people how they (and our ecosystem) are being screwed over by our current economic model - and to describe an alternative model in simple terms.
Politicians already tried; the public preferred the current model: https://en.wikipedia.org/wiki/Social_Credit_Party_(New_Zealand)
Our data is not only lagging it is massaged more than a middle aged man on a Thai vacation. Below are the Household Labour force definitions. You can easily be "employed" but not really employed . Or "unemployed" but not really unemployed.
The underutilisation is the canary in the coal mine. People on casual contracts that have been lulled into thinking they are full time during the good times of 21-22. Suddenly get their hours and income chopped in half.
Employment relates to everyone in the working-age population who did one of the following during the reference week:
worked for one hour or more for pay or profit in the context of an employee/employer relationship or self-employment
worked without pay for one hour or more in work that contributed directly to the operation of a farm, business, or professional practice owned or operated by a relative (before April 1990 this was defined as 15 hours or more)
had a job but was not at work due to illness or injury, personal or family responsibilities, bad weather or mechanical breakdown, direct involvement in industrial dispute, leave, or holiday.
Unemployment relates to everyone in the working-age population who, during the reference week, were not employed, were available for work, and:
had actively sought work in the past four weeks ending with the reference week (only looking at job adverts is not counted as actively seeking) or
had a new job to start within four weeks.
Not in the labour force relates to anyone in the working-age population who is neither employed nor unemployed (as defined above). This residual category includes people who:
are retired
have personal or family responsibilities (eg unpaid housework or childcare)
attend educational institutions
are permanently unable to work due to sickness, injury, or disability
were temporarily unavailable for work in the survey reference week
were not actively seeking work.
Yes, Govt absolutely creates new money when they spend. Commercial banks also create new money when they lend. You can watch this happening in the RBNZ data releases (D10, D12 in particular)
The amount of NZ dollars in bank accounts increases when either Govt or commercial banks create money.
The amount of NZ dollars in bank accounts reduces when Govt collects taxes or commercial banks collect loan repayments.
When Govt 'borrows', say $1M, they take $1M out of circulation and replace it with a $1M Govt bond. Govt bonds are basically very big bank notes that Treasury pay interest on. It's not borrowing, they just swap the form of the liability (debt).
Yeah I get how the commercial banks do it. I can't seem to get my head around how Govt actually does it given their separation from banks.
Isn't the Govt bond just borrowing existing surplus money (which just gets redistributed as spending) or increasing the commercial banks credit creation?
When Govt spends a brand new shiny $1M into the economy, they tell RBNZ to credit the settlement account of the intended recipient's bank with that $1M. This creates a $1M liability (debt) for Govt and a $1M asset for the bank. The bank then credits the lucky recipient's account with $1M. At the end of this process, Govt has increased its debt by $1M, the commercial bank has increased its assets and liaiblities by $1M (all square), and the lucky recipient has increased their assets by $1M.
The key to understanding this is to work out how (institutional) settlement accounts work. These accounts form a closed system between RBNZ and (mostly) banks. The balances in institutional settlement accounts are part of total Govt debt (see the diagram on page 5 of this Treasury document). Govt only sells bonds to companies with settlement accounts and will only accept payment from those settlement accounts. So, when Govt sells a bond, it's debt does not change. Govt has not borrowed anything anew - it has just swapped one liability (credit in a settlement account) for another (a Govt Bond). Govt debt increases when Govt spends.
All money is debt. A promise to pay. That is what currency is - a tax credit, a token that is accepted as payment by the tax collector.
To put it another way, the total amount of NZ dollars in circulation (in bank accounts or bonds) is equal to the total debt in NZ dollars. If we had no debt, we would have no money!
There are still some very lucrative industries out there.
"...Over that six year period, administrative costs have ballooned from $2,138,592 to $5,919,525. And although senior management headcount has only increased from 14 to 15.25, remuneration and benefits for senior management have increased from $2,013,194 to $4,390,413.
For the financial year ended 30 June 2022, transactions from Te Pou Matakana Limited (trading as the Whānau Ora Commissioning Agency) to the Waipareira Trust totalled $40,457,839.
That amount is included as a related party transaction in the trust’s latest accounts and is made up of:
Whānau Ora commissioning funding - $16,873,845
Annual management fees - $6,000,000
Covid-19 funding - $10,444,000
Research and evaluation funding - $2,000,000
IT licenses and support - $3,681,529
Lease expenses - $154,455
Operating funding - $1,304,010"
https://www.bassettbrashandhide.com/post/thomas-cranmer-john-tamihere-a…
Very few recessions are actually un-avoidable. Or to use your words - very few recessions are ever needed.
For example, GFC 1.0 was avoidable if the US Republican Party hadn't let the bankers write their own rules on how derivative markets wrote and priced their instruments. Even the Great Depression could be argued similarly based on how many countries barely noticed it and how the US government allowed unregulated lending to get wildly out or control (and how the rich the mega-wealthy had become and what would happen when they stopped spending).
Most recessions in NZ could be avoided with prompt and united Government action with equal assistance from the RBNZ. We never get it because it is not a requirement for NZ politicians to have any knowledge on any subject they vote on.
Interestingly, Jfoe notes above one time we didn't get a recession when we probably should have because of prompt Govt and RBNZ action ... the Christchurch earthquake.
But recessions are great for wealthy people as a recession allows them to hoover up more assets while the average working person's wages can be driven down.
Now riddle me this: So where does our economic policy come from? .... (Not much of riddle is it?)
Business confidence has bounced back into positive territory after the success of the National Party in the October election.
Id love to see the list of the surveyed companies. Possibly real estate agents ?
Good analysis, Dan. Many thanks.
If I may be so bold ... I do not calculate whether real incomes are increasing or declining as you do.
I want to see how much disposable incomes households have left over, the assumption being that an adjusted portion of disposable incomes will be spent (rather than saved) and the multiplier effect comes into play. (The adjusted portion is a percentage based on what we read and hear in media which affects a household's propensity to spend. It is basically my 'gut feel' in NZ but overseas word based analysis is making this measure better, even down to including the Barbenhiemer effect.)
Consequently, I stay well clear of the RBNZ's CPI which excludes certain key costs that affect household's disposable incomes.
Look at what’s happening in many areas shops are shutting doors and food establishments are around 50% of the high street this can only continue for awhile as customers have to much choice and start to feel the pinch with inflation and rates staying high, New Zealand has turn into a country which just sales houses to one another, production of products is just not happening we import so much, most people cannot afford to buy property from scratch many are also leaving for better life in other countries. A recession is on the cards unless we start investing into other areas outside of housing. Government should give tax breaks to companies which export goods and boost local manufacturing businesses.
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