Doom-spending? Don’t expect Gen Z to stop living life, recession or not.
OPINION
Welcome to Inside Economics. Every week, I take a deeper dive into some of the more left-field economic news you may have missed.
If you have a burning question about the quirks or intricacies of economics send it to liam.dann@nzherald.co.nz... or leave a message in the comments section.
That’s a question I have been asked many times since the ugly “R” word reared its head a week ago. The answer is that the data itself might not mean much at all - unless we panic about it and make it all worse.
For starters, New Zealand was already in a recessionary environment, regardless of how the GDP data landed last week. On a per capita basis the economy shrank by about 3 per cent in 2023.
In contrast, the topline figures (for the two negative quarters we call a technical recession) were -0.3 per cent for September and -0.1 per cent for December.
Your personal experience of the economy is what matters in your life. GDP is very much an aggregate measure of the nation’s economic health. You can lose your job in an economic boom and you can still get a pay rise in a recession.
But broadly, it means there is less money flowing through the economy. On aggregate, businesses are making lower profits and their focus is on costs.
That can mean lower pay rises, fewer opportunities for promotion or finding a better job - or it can mean losing your job. All that insecurity hits confidence. Consumers spend less, so business profits fall further and we are at risk of a very negative downward spiral.
So how we react to those “recession” headlines matters. It can become self-fulfilling. GDP data itself is backward-looking. The latest data only takes us to the end of 2023. And it is also quite unreliable - almost always subject to revision.
It has been pointed out by numerous economists - dating back to Simon Kuznets (who effectively invented the measure) - that treating GDP growth as the sole measure of success is deeply flawed.
It doesn’t measure a lot of positive activity in the economy. “The welfare of a nation can scarcely be inferred from a measure of national income,” Kuznets said.
On that basis, critics say, we shouldn’t let it define how happy we feel. But...
New Zealand’s economy went backwards last year and New Zealanders felt less happy than usual.
Coincidence?
New Zealand is still one the happiest places in the world but according to the IMF’s happiness index we now rank 11th - behind Finland (1st), Denmark (2nd) and Iceland (3rd). The bigger blow might be getting knocked out of the top 10 by Australia (10th).
Ironically, the arrival of the conservative Government has marked the end of efforts to put wellbeing and happiness at the heart of economic management. Former Finance Minister Grant Robertson delivered one of the world’s first wellbeing Budgets in 2019.
Finance Minister Nicola Willis will outline her Budget priorities later today, in the Budget Policy Statement. I think we can expect to see them more focused on core financial goals.
Just as New Zealand is turning its back on the “wellbeing experiment”, one of the world’s most distinguished economists has caused a stir by claiming economics needs to reinvent itself with a more humanist approach.
As Australia’s ABC reports, Professor Angus Deaton, a 78-year-old British-American Nobel Prize-winning economist, says he’s recently been changing his mind about views he’s long held and it’s a “discomfiting process”.
Mainstream economics ignores the reality of power, it neglects questions of equity, and its policy recommendations can be “little more than a licence for plunder”, Deaton writes in an essay for the IMF this month.
“Economists could benefit by greater engagement with the ideas of philosophers, historians, and sociologists, just as Adam Smith once did. The philosophers, historians, and sociologists would likely benefit too.”
Herald data editor Chris Knox has crunched the numbers around Stats NZ’s survey of household spending - a breakdown it does every three years (or four this time due to Covid).
It found that for the last four years, average household spending has increased 18.4 per cent while average incomes increased 18.6 per cent. Inflation for the roughly comparable period was 19.3 per cent.
That’s a reminder that this inflationary era hasn’t been a crisis for everyone. On average households have only gone backwards by about 1 per cent. Obviously, that’s still not great, we need to get the country moving forward and while some have done okay, others have felt much deeper pain.
The stats do show that some groups have done better than others. In fact, it may be the Baby Boom generation that felt the most impact of inflation - or at least they were the ones who cut back most on spending.
One reason for that might be that Boomers were wealthier to start with - and had more discretionary spending to cut.
But the average figure for wage increases through the past few years skews towards younger age groups, who are more likely to benefit from promotion or job-switching. We oldies tend to be stuck on more fixed incomes, so price inflation hurts more.
Conversely, though, a recession can stop younger generations in their tracks. Tighter corporate budgets mean lower wage rises, fewer opportunities for promotion and job losses.
If there is one upside to the downturn, it’s that we should see price inflation falling fast from here.
Don’t expect Gen Z to stop living life though, recession or not.
“The economy sucks so let’s go shopping!” That’s the message coming from young people in new United States research, which suggests there might be a backlash against all the economic and political gloom we’re dealing with.
About 27 per cent of Americans admit to “doom-spending” to cope with concerns about the economy and foreign affairs, reports Bloomberg News, citing research by Credit Karma, an American personal finance company. Not surprisingly, the rates are even higher among Millennials and Gen Z - at 43 per cent and 35 per cent respectively.
“Doom-spending” is defined as spending money despite concerns about the economy and foreign affairs to cope with stress.
Locked out of the housing market, locked down through some of the best years of their youth and now facing increasing job insecurity as recession bites, it’s not hard to sympathise with the reckless financial attitude.
But stay in KiwiSaver kids... and avoid credit card debt! Hang in there. Keep investing in your skills and career, the economy will keep turning and opportunities will open up. That’s my advice.
In a research paper released last week, NZIER economists Peter Wilson and Julie Fry tackled one of the big questions hanging over our economy for the past year.
Has record immigration of the past year caused more inflation or less?
In general, the effect of migration on demand for goods and services occurs almost immediately as net migration rises, whereas supply effects can lag, Wilson and Fry write.
But with the borders closed and acute labour shortages pushing wages up, the assumption with this latest wave, was that higher net immigration initially helped ease inflationary pressure. Then as demand-side pressure went on rental accommodation and extra spending flowed through the economy it must have started adding to the problem.
It’s a difficult and nuanced equation to solve.
BusinessDesk’s Jem Traylen has summarised the research and concludes that the answer, unfortunately, is “it depends”.
Wilson and Fry’s advice to the Reserve Bank (RBNZ) is that much of the existing local research, on migration’s inflationary impact, is well out of date.
Most of it was done by an old Department of Labour programme that ended in 2010, Wilson said.
Over the last few decades, “settler”, or long-term, migration has reduced in importance in New Zealand, and we’ve now got many more temporary migrants who can have lower demand impacts, particularly if they’re sending remittances back home.
Commenting on the NZIER paper, RBNZ chief economist Paul Conway noted “there are no clear rules of thumb on the effects of migration on the economy as a whole and inflation”.
“We have seen many waves of migration into and out of New Zealand in the past century. Each wave is different and with differing effects on inflation pressures,” Conway says.
More research is needed. That’s the big take-out from the report. It’s a fiendishly difficult thing to keep up with because policy and global trends won’t sit still. It’s probably inevitable that by the time we see a clear picture of this latest wave, we’ll be dealing with new issues.
One thing we can be sure of at least: New Zealand Governments aren’t going to stop using immigration policy as a lever to pump the economy.
Here’s hoping we can line policy up to drive the productive end of the economy - a challenge that Fry and Wilson have been working on for several years.
Ominous oil price
This chart is a reminder of how tough the war on inflation is to win. Commentators say oil prices have been on the rise due to expectations that interest rates will soon fall, bringing stronger global economic growth. Of course, higher oil prices drive cause inflation. And if inflation stays high then interest rates won’t fall... and around we go!
Last week I noted that economic research group the New Zealand Initiative had found an unusual $52 billion discrepancy between New Zealand’s large current account deficits and its net international investment position (NIIP).
Author Bryce Wilkinson said his research “questions how New Zealand has managed to sustain its large and growing current account deficits with the rest of the world without seeing a corresponding deterioration in its net international investment position (NIIP)”.
Wilkinson describes the big mystery as being: “who has been funding the $52b that Statistics New Zealand has had to attribute to “errors and omissions”.
Unfortunately, Stats NZ can’t solve the mystery. Although they do note that the latest balance of payments data (released last week) shows the gap narrowing:
Paul Pascoe, Stats NZ senior manager for Institutional Sector Insights says:
“There is always a level of measurement uncertainty in the balance of payments, expressed as the ‘net errors and omissions’ item in the accounts, and this has increased in recent periods. In Aotearoa New Zealand, the measurement of financial flows to finance the current account deficit tends to contribute the most to net errors and omissions.
“Stats NZ has ongoing work to identify any potential areas of under coverage in the financial account during a time of rapid change in global markets. The latest balance of payments release (published March 20) highlight some of the results of this work, reducing the cumulative measurement gap of $52b over 15 years by about 10 per cent.
“FYI, Bryce Wilkinson’s piece predates the release of [balance of payments December 2023 quarter] figures, which contain revisions for the [September 2023 quarter] that reduce some of the ‘mystery’ but don’t undermine his overall analysis.”
If you have a burning question about the quirks or intricacies of economics send it to liam.dann@nzherald.co.nz... or leave a message in the comments section.
Liam Dann is business editor-at-large for the New Zealand Herald. He is a senior writer and columnist, and also presents and produces videos and podcasts. He joined the Herald in 2003.
OPINION: Last week's GDP shocker took the edge off the Christmas cheer,