That other word R continues to hold serious power over the public imagination. I’ve seen a huge spike of interest in economic news since we found out last week that we’re in a technical recession.
We saw business and consumer confidence stopped in their tracks — after a steady rebound since October.
The ANZ Business Outlook and ANZ Roy Morgan Consumer Confidence surveys for March, released on Thursday, both showed significant falls.
ANZ chief economist Sharon Zollner noted the drop was most pronounced in the last week of the survey after news of the recession hit the headlines.
There are several reasons this has to be a case of perception over reality.
For starters, we were already in a recessionary economy. As you’ll have heard numerous times in the past two weeks, we’ve been in a deep per-capita recession for about a year. That’s a combination of top-line activity flatlining while we have added record numbers of new migrants to the population.
So, on an individual level, we already knew things felt bad — in fact, per-capita GDP shrank more than 3 per cent in 2023.
The top-line GDP numbers that landed last week were considerably more marginal. The second quarter contraction, required to meet the technical definition, was only 0.1 per cent.
Anyone who has followed the economic data for a while can tell you that’s margin-of-error stuff.
It’s so close to zero that any number of coincidental factors could have pushed it into negative territory — or just as equally into positive.
When we consider that GDP data is almost always revised months later (it is one of the biggest and most complex data sets) it makes the weight we put on that 0.1 per cent contraction more spurious.
Finally, we should remember that the data showed only that we “were” in recession. It was for the period up to December 31.
Life moves fast. Today we finish the first quarter of 2024. Perhaps GDP bounced (gut feel says it hasn’t) but regardless, why did confidence improve right through the recessionary months, only to take a hit when we measured it?
It all sounds a bit like the spooky action of particles in quantum physics that don’t have a position until they are measured (Schrodinger’s cat being the popular analogy).
Of course, economists have long known that perception is a powerful driver of reality.
When we collectively agree things are bad, we’re more likely to put our wallets away and a recessionary spending crunch exacerbates whatever else has caused the underlying conditions ― ie global export prices, financial crash or, in the present case, a rapid rise in interest rates.
What we are experiencing on a personal level can take a back seat.
That’s why normally in a recession you’ll hear politicians, central bankers and commentators like me trying to boost confidence and convince people it will all be all right.
We don’t want gloom and despair to set in and make it all worse.
But it’s a bit different this time. We need a bit of gloom to get rid of that last sticky bit of inflation — then we can all cheer up.
Reserve Bank governor Adrian Orr has talked in the past few days about our inflation expectations needing to fall.
That’s because when perceptions of high inflation become embedded, they also become self-fulfilling.
Workers are more inclined to expect higher wage rises, and businesses more inclined to pass on costs.
We all know the cycle needs to end, but who wants to be first to call time? Everyone is in catch-up mode and nobody wants to miss out.
That’s where screaming recession headlines might help us move things forward this time.
The good news in the business and consumer confidence surveys was that inflation expectations were starting to fall.
Firms still reported expected costs and wages to rise during the next year.
But, more encouragingly, pricing intentions dipped slightly, and inflation expectations went under 4 per cent for the first time since late 2021, ANZ’s Zollner said.
“Firms’ numerical estimates of where their own selling prices will be in three months’ time continue to trend down with a lift for the retail sector outweighed by falls elsewhere,” she said.
And, while the proportion of firms expecting higher costs was going sideways, the magnitude of those expected cost increases was falling.
Inflationary problems — finding labour, high wages, high other costs, and regulation and paperwork — continued to decline, while disinflationary problems of low turnover and competition rank higher.
It’s weird to be cheering on the recession. Obviously, we want fewer job losses and business failures.
We want to see the whole economy going forward sooner rather than later. Tightening our belts and embracing the doom and gloom for a few months won’t be fun.
But if it means inflation falling faster, then this cycle might turn faster. Interest rates can come down sooner and we could see less economic and social damage in the long run.
Recession by any other name, however, still stinks.
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.
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. He’ll try to answer in Inside Economics, a new column published every Wednesday.
