6 min read

What is a recession?

Headlines shouting ‘recession’ might send you spiralling, imaging queues of people, cap in hand, hoping for a free bite to eat. But while it’s a highly charged word, recession is a technical term that may not be so terrifying when you dig a little deeper. So spades at the ready, we’re going in!
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June 21, 2023
Belinda Nash

So New Zealand has entered a recession. But what is a recession, what does a recession mean for NZ and how does a recession affect you?

MoneyHub’s definition of a recession in New Zealand describes it as temporary back-to-back periods of negative or slowing economic activity. Here, the economic activity refers to gross domestic product (GDP), and the period of time is two blocks of three months, referred to in finance terms as ‘quarters’. 

In Aotearoa New Zealand, GDP typically refers to the production approach to GDP, which is the measurement that tallies the value of the goods and services we produce here. The GDP result for each quarter reveals insights and trends about the general health of our economy - whether it’s up and running (growing), or it might be spending a couple of days in bed (slowing).

The June 2023 recession we’re hearing about over the water cooler, announced by Statistics NZ, is the two back-to-back periods of the December 2022 quarter, which experienced a GDP drop of 0.7%, followed consecutively by the 0.1% drop in the March 2023 quarter. 

Is New Zealand in a recession? When put side-by-side, the December + March quarter economic activity declines = a technical recession, so yes, New Zealand is in a recession. Although Interest.co.nz’s David Hargreaves describes the decline as the ‘merest fraction’. He adds that ‘we only JUST made the technical description of a recession’, suggesting that ‘we really should not get hung up on the 'R' word’.

Is the US in a recession? Despite the Fed (the Federal Reserve System central bank) raising interest rates 10 times since September 2022 in a bid to slow inflation rises, and some economists thinking a ‘mild’ US recession could be on its way, the US economy is growing - if only slightly - and may achieve a ‘soft landing’ according to Morgan Stanley Research and some say is unlikely to slide into recession. This is because the US job market continues to grow - adding more than 330,000 new jobs in May 2023. The S&P 500, the benchmark ETF (exchange-traded-fund), which contains a basket of the 500 leading US publicly-listed companies, has responded positively to the Fed’s slowing inflation. It shows YTD growth of more than 15%, and has pulled out of its October 2022 slump, rebounding 23%, and nearly 20% in a year. 

How long does a recession last?

A recession is a temporary state that can last just months - aka several quarters - as it did when world economies reacted to the sweeping effects of the global pandemic. Or a recession can go on for years, as it did in the 1990s and again during the Global Financial Crisis (GFC) of 2007-2008, which caused a global recession that continued in New Zealand through six consecutive quarters.  According to Investopedia, what causes a recession is hard to predict, their possible causes are often only known after the recession is over, and more recent recessions have been much shorter than those of the past.

Should you be worried about the NZ 2023 recession? 

Over the past 500 years, national and global recessions have been cyclical, occurring on average every five to ten years. This means, just like the proverbial death and taxes, we’re better to stay pragmatic and be prepared for them rather than worry about them.

Why is New Zealand in recession?

Economic recessions and growth rebounds are cyclical, and economic activity - such as spending and employment - can be influenced by local and global effects. As to what caused the New Zealand June 2023 recession, any number of impacts may have contributed to it but we may not understand the full picture until economists have done the research.

That said, New Zealand’s current recession may have been impacted by the War in Ukraine, global oil supply challenges and supply chain issues. According to Stats NZ, January and February’s Cyclones Gabrielle and Hale had an impact on New Zealand’s economic activity and GDP. General manager Jason Attewell added that adverse weather effects ‘contributed to falls in horticulture and transport support services, as well as disrupted education services. Fewer teaching days led to falls in primary and secondary education services’.

In addition, in an attempt to slow borrowing, this May New Zealand’s Reserve Bank (RBNZ) raised the official cash rate (OCR) to a 14-year high of 5.5%. This typically triggers a rise in bank interest rates and therefore increases the cost of Kiwis being able to borrow money. This is essentially the RBNZ pulling the brakes on the economy and making consumers tighten their belts and reduce their spending.

Raising the OCR is used by the RBNZ and other countries’ central banks as a tool to slow inflation, which rose when economies re-opened after Covid lockdowns. New Zealand’s inflation is measured by the consumer price index (CPI), which plots the cost of basic goods and services bought by New Zealanders over time.

How to manage your money during a recession

To help plan your way through the current New Zealand recession, online resources that may help your situation include:

What happens in a recession?

You may be asking ‘how will a recession affect me?’. While history suggests that modern recessions tend to be brief and their effects small, it may not feel that way in your household as you try to keep your house warm, lights on, and your tummies and petrol tanks full. 

Historically, recession effects have shown to shrink employment, and influence business and consumer spending and confidence, and therefore impacts could include: 

  • Some employers may slow or pause hiring new employees
  • Some expected or promised wage increases may be delayed
  • Some businesses may make some roles redundant or layoff staff
  • The rate of unemployment may rise 
  • Business and consumers may spend less 
  • We may put discretionary money towards an emergency fund
  • We may delay spending on larger items, like a new car, new house or overseas holiday, and instead spend on smaller items
  • We may look for cheaper going out options, or stay at home to cook or watch movies
  • House prices may remain steady or decrease and the housing market may slow down with fewer people choosing to sell their houses
  • Rents may increase
  • High interest rates may decrease business and consumer access to credit
  • Investment property owners may ‘struggle to find’ a reasonable income from rents 

Forbes suggests that fear around what a recession may mean can influence behaviour, saying: 

‘The more everyday investors and consumers worry about an economic downturn, the more likely they are to pull back spending. (Ironically, increasing the chances that a recession will head their way.)’. 

So, instead of being worried, try to be prepared.

Recession vs depression

While a recession may make you feel a little depressed, recession and depression are economic terms that play out differently in the economy. Both represent a slowing economy. But while recession refers to a ‘significant’ drop in GDP,  depression signifies a ‘severe’ drop in GDP that sustains over years (not months). Depression is also typified by a number of flow on impacts, such as sector-wide job losses and high rates of unemployment, corporate and personal bankruptcies, and the value of goods and services plummeting.

Which brings us to the history of recession, where we zoom out and take in the full picture of economic ups and downs. And when we realise it may be better to get super comfy in our pandemic trackies knowing that recessions come and go so we need to be prepared to banana bread bake our way through them!

A brief history of recession

Despite modern economies continually expanding over time, at least once every decade a nation like New Zealand’s has historically experienced both economic growth and economic retraction.

Have there been other recessions? In the US, since the Great Depression nearly 100 years ago, its economy has cycled through 14 of these technical economic recessions. And according to the International Monetary Fund, in the nearly 50 years between 1960 and 2007, more than 20 ‘advanced economies’ were in recession as much as 10% of the time. Let’s look at two of the more recent recessions.

2020 pandemic recession

In 2020, New Zealand experienced a short recession of two back-to-back quarter economic slow downs. The first was the March 2020 quarter, a time many of us recall well; when we queued to buy loo paper, talked to extended whānau on devices, stood at the end of the driveway to commemorate Anzac Day, and learned how to bake banana bread. And while New Zealand’s borders were closed in an attempt to keep Covid at bay, as we shopped for track pants and flour, our economy shrunk 1.6%

As pandemic worries descended, this was followed by a much larger drop of 12.2% in June 2020. But by September 2020, the recession officially ended with New Zealand’s ‘largest quarterly rise’ on record, seeing a 14% lift in economic activity.

2008-2010 New Zealand recession and GFC

The New Zealand economy fell into a recession in March 2008 due to a mix of domestic and international causes. This included drought, oil price hikes, high interest rates coupled with falling house prices, and slowing construction and manufacturing. New Zealand also experienced a steep drop in exports and tourism due to slowing global demand caused by the Global Financial Crisis (GFC). 

The New Zealand recession was considered relatively mild, or shallow. However the job market between 2008 and 2010, measured by QES, fell for six consecutive quarters. And unemployment climbed to the highest rate in 10 years, landing at 6.8% before dropping.

1900s New Zealand recessions and the Great Depression

Consumer affairs reporter Rob Stock’s analysis on Stuff, written as the country pulled out of the short Covid-triggered recession in 2020, paints a picture of New Zealand’s century of economic downturns. Including: 

  • 1991–1992 recession and the Asian Financial Crisis - deregulation and a surge of unemployment in New Zealand caused havoc in the early 1990s, then as Kiwi farmers battled drought, a major export partner, Asia, fell into a recession
  • The 1973 Energy Crisis - when global oil price hikes triggered global recession, New Zealand inflation averaged 11.5% and Kiwis faced ‘car-less’ days.
  • The ‘Wool Bust’ of 1967-1969 - when the global wool market fell by 20% in 1967 and a further 20% in 1968 causing New Zealand to lose an eighth of our export earnings
  • The Great Depression of 1928-1933 - where unemployment spiked as much as 20%

Investopedia’s article here dives into past recessions with a US-based lens. 

Bottom line is recessions (and rebounds) are a normal part of the economic cycle and currently, New Zealand’s recession is very slight. Just remember that you managed your way out of the 2020 recession and if you didn’t apply them then, there are plenty of resources online to help you get through this one.

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We’re not financial advisors and Hatch news is for your information only. However dazzling our writing, none of it is a recommendation to invest in any of the companies or funds mentioned. If you want support before making any investment decisions, consider seeking financial advice from a licensed provider. We’ve done our best to ensure all information is current when we pushed ‘publish’ on this article. And of course, with investing, your money isn’t guaranteed to grow and there’s always a risk you might lose money.

Belinda Nash
Finance writer

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