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1. What is a recession?
A recession is a period of economic contraction. What usually happens is that consumer spending falls, unemployment rises, and business investment falls.
A technical definition of recession is two consecutive quarters of negative quarterly GDP growth. GDP declines during the March and June 2020 quarters officially put New Zealand into recession.
During the Global Financial Crisis (GFC), GDP contracted in six consecutive quarters, from March 2008 to June 2009, and again in the quarters of September 2010 and December 2010. The largest contraction during that period was a fall 1 percent of GDP in the March 2009 quarter.
Infometrics Senior Economist Brad Olsen describes the economic impact of the GFC as a “more prolonged fire” than the COVID-19 pandemic.
“Events took longer to unfold … this [COVID-19], we hit depression immediately, now we are trying to rebuild, he said.
During the Great Depression of 1932, New Zealand’s GDP is estimated to have fallen 7.1 percent in 12 months, he said.
Other notable falls in GDP include the March 1991 quarter, where it fell 2.4 percent. This followed the worldwide stock price crash in October 1987.
2. Why was GDP negative in the June 2020 quarter?
Covering the period from April 1 to June 30, the June 2020 quarterly GDP result was measured during COVID-19 alert levels 1-4. It included 27 days of COVID-19 alert level 4 lockdown, which accounted for 30 percent of the GDP result.
Olsen said the 12.2 percent drop in June reflects a level of economic activity seen five years ago. The key factor was level 4 blocking, followed by level 3 restrictions.
“At Alert Level 4, New Zealand’s economy received life support, and a considerable part of the economy was unable to operate. Apart from essential services, stores were not operating, so people were unable to spend, construction could not occur, and movements were limited, “he explained.
But on the bright side, the agriculture and food production sectors continued to function during the shutdown. This helped maintain a basic level of economic momentum.
3. How does New Zealand’s record drop in GDP compare to the rest of the world?
New Zealand’s GDP drop in March 2020 of 12.2 percent is a record contraction. But to put that figure in context, recent global declines range from 7 percent (Australia) to 20.4 percent (UK).
Olsen said the huge drop in GDP for the June quarter shows that New Zealand was immediately hit by the pandemic. But that was largely due to the quick response.
“Although the immediate impact could be harsher, the way forward for New Zealand is more optimistic than in other parts of the world that are still dealing with the outbreak,” he said.
4. We are now in the third quarter of 2020: is the recession over?
Economists expect that quarterly GDP has reached the lowest point in this cycle, but that the impacts of COVID-19 will continue until mid-2022.
“We expect this recession to last only through the first half of 2020. That said, we expect the effects of the outbreak to weigh on activity in the coming years,” said NZIER Chief Economist Christina Leung.
Olsen said that while the recession will technically end in the September 2020 quarter, that does not mean that consumer spending and business investment will return to normal.
“He is saying that things are not getting worse, but conditions are still more difficult than before the pandemic,” he said.
Economist Cameron Bagrie said the September quarter promises a rebound in activity. But he agrees with the consensus that it will take until mid-2022 for the economy to reach the same size it was before COVID.
“I think this will be the lowest point, that was an extreme scenario when we locked down the economy,” Bagrie said.
“We see an economy that is stumbling. GDP is about growth – it will take a long time to reach that level,” he said.
If the economy evolves as expected over the next few months, Olsen expects a rebound in activity in September and December. This will be reflected in a slightly smaller drop in annual GDP.
5. Should I be worried?
The COVID-19 aid package, which has paid out about $ 13.9 billion in wage subsidies, has helped cushion the blow from the COVID-19 pandemic.
As wage subsidies and COVID-19 relief payments shrink and borders remain closed with zero net migration, economists expect unemployment to rise.
The Treasury’s fiscal and pre-election update (PREFU) released on Wednesday forecasts unemployment to peak at 7.7 percent in 2021, falling to 5.3 percent in 2024.
Olsen expects the country to go through a period of adjustment, where jobs and businesses are lost and new businesses emerge. Rising unemployment is a cause for concern, especially for those seeking a new job.
“At the same time, we have a number of companies that are still in a strong position and looking to forge a new path,” he said.
For households and families, the next few years are going to be difficult. Confidence will be a key factor in getting the economy going again. Support from businesses, households, and the government will be critical to the recovery.
“Those elements will tell us how quickly we can make the economy sustain itself.”
