The real concern now is not a recession, it is that we cop the worst of both worlds - stagflation.
The real concern now is not a recession, it is that we cop the worst of both worlds - stagflation.
OPINION
There’s a lot of speculation about whether we’ll now avoid a long-predicted recession later this year. At this point does it even matter?
Next week we’ll get GDP data that might tell us if we’ve just been in a recession. How was it for you?
Depending on the waythe numbers fall on Thursday, they will be trumpeted by one lot of politicians or the other as a sign we’re doing okay, or that we’re not.
Meanwhile, New Zealanders will all have their individual take on how tough it is out there.
There’s a popular view that the Reserve Bank is trying to engineer a recession by hiking rates to squeeze inflation out of the economy.
That’s only partly true.
The Reserve Bank is trying to engineer a reduction in domestic economic demand with a view to bringing inflation down - whether that results in something we decide to call a recession isn’t really its problem.
Typically it is the Government’s problem because recessions make for very bad headlines and offer pretty good fuel for opposition parties already convinced everything has gone to hell in a handbasket.
But given the forecast numbers are all looking so marginal, we might justsee the opposite scenario play out.
That is to say, expectations are that we’ll avoid a technical recession by the thinnest of margins. Does that mean everything is fine? Should it let the Government off the hook?
The point is that the already vague definition of a recession is starting to look increasingly redundant in the current economic cycle.
What recession means with inflation still high and unemployment still low, is really anybody’s guess.
Last month BNZ head of research Stephen Toplis pondered the prospect that we’ve already had our recession:
“Recession. A word that engenders as much emotion as it does definitional debate,” he said.
“And this is not just about whether a recession will play out in New Zealand later this year, or not (especially with surging immigration promising to make the economic aggregates look better than otherwise, through sheer force of headcount). Even the Treasury and the RBNZ can’t agree, so who is anyone else to be so sure?”
This seems like as good a time as any to think about what a recession actually is.
In this country, we are obsessed with a popular definition that most economists no longer take seriously.
If we have two quarters in a row where the economy contracts we call that a recession and get very animated about how terrible everything is.
But the timeframes for this definition are pretty arbitrary.
Economists and corporate bosses think in quarters. The rest of us tend to care more about the kind of year we’re having.
If we have a year where there is a big economic slump in the first quarter, a second quarter where growth is marginally up, then a big third-quarter slump and another marginally positive fourth quarter - is that a good year?
We might have avoided technical recession but the economy won’t feel good to most people.
When economists get serious about assessing the state of the economy they tend to look both at growth across quarters and more qualitative measures, like unemployment, to get what gets called a classical definition of recession.
In the US they have a committee of leading economists (National Bureau of Economic Research) that is empowered to make an official call on whether the economy is in recession.
Reserve Bank Governor Adrian Orr. Photo / Mark Mitchell
That call still has to be made at a macro-economic level, of course, because we all experience an economy differently.
There are a lot of people, particularly those on fixed incomes, who will have found the high-inflation high-growth environment difficult.
Conversely, younger people without mortgages and more discretionary income are more likely to feel the pain as unemployment rises and inflation falls.
But persistently low unemployment levels mean most people have jobs and so have been able to tread water through the tough part of the economic cycle - at least so far.
The number of mortgage arrears actually fell in the last set of Centrix data.
Missed mortgage repayments fell to 1.27 per cent of the active population, down from 1.31 per cent in March, with 19,000 mortgages reported past due. They still remain below pre-Covid levels when they were 1.35 per cent in December 2019.
The media is very good at highlighting case studies of people’s struggling to cope with high interest rates. But in reality, there are fewer people struggling to pay the mortgage now than there were across the last decade.
Based on higher-than-expected net migration gains, the return of tourism and stimulus from the cyclone rebuild, there are growing expectations we might have seen the worst of the economic slowdown - at least in a technical sense.
Treasury no longer has us in recession later this year, the Reserve Bank still sees one - but only just and well within the margin of error.
So in short, we’re not seeing the kind of classic economic shock that we associate with recessions from years like 1991 and 2009.
This is something different and it is causing a different kind of economic pain.
Unfortunately, that’s only sort of good news because if the economy has picked up steam again with inflation still running high, what happens then?
Presumably, interest rates just go even higher.
The real concern now is not a recession, it is that we cop the worst of both worlds - stagflation.
An economy with high inflation and low growth is not good for anyone and there is currently a risk that we could get stuck there.
