The ‘R’ word: What is a recession and why should you care?

The Reserve Bank says New Zealand is headed for a recession, but what does that even mean?

Kathryn George

The Reserve Bank says New Zealand is headed for a recession, but what does that even mean?

Unless you’ve spent the past few days under a rock, your ears are probably ringing with the word “recession”.

In a pretty grim update on Wednesday the Reserve Bank predicted New Zealand will tip into a recession next yearalbeit a “shallow” one.

Since then the “R” word has been on high rotation in the media and among politicians and economists alike.

But what exactly is a recession and what might it mean to you if we find ourselves in one?

READ MORE:
* How will the OCR rise affect you?
* Live: Recession needs to happen, Adrian Orr says after OCR hike
* Reserve Bank statement shows ‘things are worse than we thought’

What is a recession?

The technical definition of a recession is two quarters of negative growth in gross domestic product (GDP). Clear as mud? Thought so.

NZ Parliament

Reserve Bank governor Adrian Orr faces up to MPs in wake of hawkish monetary statement.

GDP refers to the value of all the goods and services made or provided in a country within a particular period.

When a country’s economy is doing well, GDP increases. That’s good – it means more jobs, more profitable businesses and better pay for employees.

Higher wages and profits mean more money goes into the government coffers through taxes and there’s more cash available to spend on essential public services, benefits. There’s also the potential for tax cuts.

When the economy shrinks, so does all of that. And when the downturn lasts for two three-month periods (quarters) in a row, you have yourself a recession.

What causes a recession?

Some can be linked to a clear cause, like the oil crisis in the 1970sbut others are the result of a combination of factors.

High interest rates, rising unemployment, falling consumer confidence and low investment can all play a part. So can economic shocks caused by unpredictable events like natural disasters, war or – you guessed it – a pandemic.

Economic shocks caused by unpredictable events like the Covid-19 pandemic can play a part in triggering a recession.  (File photo)

Ryan Anderson/Stuff

Economic shocks caused by unpredictable events like the Covid-19 pandemic can play a part in triggering a recession. (File photo)

What would a recession mean for the average Joe or Josephine?

Probably not much in the short term, especially if it lived up to its billing as a “shallow” or less severe recession.

Thanks to rising inflation and living costs, most people are already spending more than they usually would so simply declaring a recession would be unlikely to create any major shocks on a household level.

A longer period of recession would lead to a tougher time for businesses, job losses and rising unemployment. The Reserve Bank has predicted official unemployment will climb to 5.7% in 2025, from 3.3% currently.

And because the effects of a recession are generally not felt equally, those on benefits or fixed incomes would be more likely to struggle.

Do recessions happen often?

Recessions are a normal part of the business cycle, so probably more often than you think.

New Zealand’s last recession was in the first half of 2020when economic output dropped in both the first and second quarters of the year.

Prior to that, the country experienced six quarters of negative growth in the aftermath of the global financial crisis (GFC) in 2008-2009.

Reserve Bank governor Adrian Orr says New Zealand can still avoid a recession, but we'll need to cut spending to do it.  (File photo)

ROBERT KITCHIN/Stuff

Reserve Bank governor Adrian Orr says New Zealand can still avoid a recession, but we’ll need to cut spending to do it. (File photo)

There were also periods of recession in the 1960s, 70s and 90s.

Can we avoid one now?

Possibly, but it looks like we’ve got our work cut out for us. On Thursday Reserve Bank governor Adrian Orr​ told a select committee the central bank was “engineering” a recession in a deliberate attempt to slow spending and rein in inflation.

However, the public could avoid the need for a calculated economic contraction by collectively cutting spending and assuming inflation would fall, for example when negotiating pay rises, he said.

“The power is in the hands of the people. You know, if you just start behaving, ‘1% difference’ around inflation expectations and wage growth that makes our job easier. We don’t have to pay that cost.”

Leave a Comment