Brian Easton wonders what are the economic and political implications if the New Zealand economy stagnates for five and more years?

This is a re-post of an article originally published on pundit.co.nz. It is here with permission.

Prime Minister Christopher Luxon told Morning Report that ‘We've got the worst recession* we have had in 30 years’. (Observe, he could have said ‘since the Rogernomics Stagnation which finished 30 years ago’, but some things may not be mentioned in public.)

One takes it that he is referring to assessments like Treasury’s 2025 Budget Economic and Fiscal Update which reports a three-year downturn from September Quarter 2022 ; although my impression is that everyone has become even gloomier since May. Treasury then did not expect the economy to reach the September 2022 per capita level again until September 2027 (a year after the next election). Treasury expected the decline to bottom out about now. But the return to growth is slow and if the Treasury is right, the economy will grow at about its earlier rate, with a track about 8 percent lower than in the past. That would mean it has lost about five years of economic growth in this ‘recession’. We are not having a business cycle fluctuation.

One can fiddle around with these figures, but the basic story would remain unchanged. Luxon is talking about a long recession; although he does not give an explanation as to why it is happening. (He mentions ‘the Covid hangover with all the extra spending’ but that simply brings the ‘recession’ forward; it changes neither its shape nor existence.) His promise to ‘fix the economy’ is without much explanation either. As my In Open Seas observed, trying to fix something without understanding what went wrong is a common approach in New Zealand.

There have been five great stagnations in the last 160-odd years. Excluding the Rogernomics one, which was unique to New Zealand and probably reflected policy incompetence, the other four were all associated with global stagnations, although excessive borrowing may have intensified the experience here. It turns out that currently most of the countries whose macroeconomics I monitor closely – America, Britain, China, the European Union, France, Germany, Japan, Russia – are struggling (as are many others). Germany, for instance, is beset with a recession and a not very robust governing coalition. (Holger Schmieding, chief economist of Berenberg, a German bank, said that the German premier, Friedrich Merz ‘is not an experienced politician, he acts more like a CEO’.)

Their difficulties could be – like New Zealand’s – attributed to the post-Covid unwinding compounded by the chaos that Trump’s tariff warfare is adding to the world economy, perhaps most by adding to decision-making uncertainty.

(A caution. We are only three years into this ‘recession’. While that makes it longer than a conventional business cycle. Treasury does not think it will last as long as our great stagnations.)

Observe that some economies currently in ‘recession’ were struggling before the Covid pandemic (in a way that New Zealand was not), tempting one to dismiss Covid as the underlying cause of the current difficulties but compounding them. What are those underlying processes?

First, leave aside China, whose astonishing growth phase seems to have come to an end. I am reminded of what happened to Japan, which also had an impressive growth burst which flattened out, leaving its economy struggling for decades. Warring Russia is also obviously a special case. The remainder are affluent economies.

I have discussed whether they are suffering secular stagnation. I shan’t go through the details; you can see them here and here. What is critical is that while affluent economies and their societies continue to evolve, it may be a different evolution from that with which we are familiar in the last two centuries.

So different that we are struggling to explain exactly what is happening. We need much more experience and data to be confident in our analysis. On the other hand, uncomprehending nostalgia tends to invoke the unthinking inertia of using a paradigm of the past. I am afraid that is what I hear from Luxon. I do not have a lot of respect for the policy thinking (if any) of the Ardern-Hipkins Government – and I have yet to be convinced that Labour in opposition is any better – but I credit them with trying to cope with evolving New Zealand even if they could not explain this to themselves.

Luxon campaigned on ‘back on track’ which was a return to the policies of the past with little recognition that things were changing. – not only in the economy. Morning Report headlined that he claimed that his government’s ‘policies were working to fix economy, raise living standards’, although how he was proposing to do so either does not appear to have been covered in the interview.

Obviously improving infrastructure, making regulation more effective and increasing trade opportunities are worthwhile, but they are not particularly related to the ‘recession’. (We may argue over increasing exploitation of depletables, as is Shane Jones’, ambition, but again the approach is not particularly about the ‘recession’.)  None explain why the ‘recession’ began in the early 2020s.

Luxon appears to be assessing the issue as being one of growth of GDP – the measure of market output – rather than wellbeing. Increased GDP is a goal welcomed by business because it increases profits – a lot of businesses are struggling at the moment. Moreover, increased GDP is associated with increased tax revenue, although it will also increase the need for additional public spending because of its downsides. Whether there is a net gain depends upon the degree to which the government responds to these expenditure pressures.

Indeed, the Coalition Government has reduced its commitment to the arts and culture, the environment (including reducing carbon emissions) and to public health, matters which the public will judge them on.

That political judgment occurs in just over a year’s time in the 2026 General Election. The indications are that the state of the economy – say, measured by the unemployment rate – will be a little bit worse than it was at the 2023 election but prospects may be improving, whereas in 2023 they were looking dimmer (and were made even dimmer by some of the actions the Coalition Government undertook).

However, the role of the economy in the election campaign may depend on the Labour Opposition – I doubt that a capital gains tax will be decisive either way, except perhaps to stiffen loyalists in either camp. Events over the next 12 months are likely to be more important. Key ones may be unpredictable. Ability to manage coalitions may be critical.

Even so, trying to understand and respond to our long recession will almost certainly involve our adapting overseas analysis for New Zealand’s unique circumstances. The affluent world may be entering on ‘secular stagnation’ as assessed by GDP. If so, we probably cannot avoid that fate either.

* Recession has various economic meanings. Traditionally, it referred to a particular stage in the business cycle but when the cyclical downturn is stretched out beyond the normal length it becomes something else, often called a ‘long recession’ (as occurred after the GFC) which may morph into a long stagnation (it did not in the case of the GFC). I have put recession in quotation marks to emphasis that Luxon and all are talking about a long recession where traditional business cycle analysis may not apply.

*Brian Easton, an independent scholar, is an economist, social statistician, public policy analyst and historian. He was the Listener economic columnist from 1978 to 2014. This is a re-post of an article originally published on pundit.co.nz. It is here with permission.