New Zealand in recession: What you need to know

Negative GDP for two consecutive quarters confirms New Zealand is technically in recession.   But how long will it last?
Negative GDP for two consecutive quarters confirms New Zealand is technically in recession. But how long will it last? Photo credit: Getty.

Thursday's record 12.2 percent fall in Gross Domestic Product put the country firmly in the grips of a recession. 

Given COVID-19 has caused widespread uncertainty, the news was not a surprise. Alert level restrictions forced businesses to close and job losses to rise. Businesses operating in industries such as construction, retail and hospitality were forced to shut down for at least 43 days under alert levels 3 and 4, from April to June.

But what does this mean for the average Kiwi? Should we be concerned, or will the economy bounce back in the next quarter? 

Newshub asked leading economists whether this is just a blip and what will help the economy out the other side.

1. What is a recession?

A recession is a period of economic contraction. What typically happens is consumer spending drops, unemployment rises and business investment falls.  

A technical definition of a recession is two consecutive quarters of negative quarterly growth in GDP.  Declines in GDP over the March and June 2020 quarters put New Zealand officially in recession.

During the Global Financial Crisis (GFC), GDP contracted in six consecutive quarters, from March 2008 to June 2009, and again the September 2010 and December 2010 quarters. The highest contraction over that period was a 1 percent drop in GDP in the March 2009 quarter.  

Infometrics senior economist Brad Olsen describes the economic hit from the GFC as a "longer burn" than the COVID-19 pandemic.

"It took longer for events to play out...this one [COVID-19], we hit the trough immediately - now we're trying to rebuild, he said.

During the Great Depression of 1932, New Zealand GDP is estimated to have dropped 7.1 percent over 12 months, he said.

Other notable falls in GDP include the March 1991 quarter, where it fell 2.4 percent. This followed the global share price collapse in October 1987.

2. Why was GDP negative in the June 2020 quarter? 

Covering the period of April 1 to June 30, June 2020 quarterly GDP result was measured during COVID-19 alert levels 1-4.  It included 27 days of COVID-19 alert level 4 lockdown, which represented 30 percent of the GDP result.

Olsen said the 12.2 percent drop in June reflects a level of economic activity seen five years ago. The key driver was the level 4 lockdown, followed by level 3 restrictions.

"At alert level 4, the New Zealand economy was put on life support, with a considerable amount of the economy unable to operate. Aside from essential services, shops weren't operating so people couldn't spend, construction couldn't occur, and movements were limited," he explained.

But on the positive side, farming and food production sectors continued to work throughout lockdown. This helped to retain a base level of economic momentum.

3. How does New Zealand's record fall in GDP compare to the rest of the world?

New Zealand's March 2020 GDP fall of 12.2 percent is a record contraction.  But to put that figure into context, recent global falls span 7 percent (Australia), to 20.4 percent (United Kingdom). 

Olsen said that the huge fall in the June quarter GDP shows New Zealand took an immediate hit from the pandemic.  But that was largely due to the fast response.

"Although the immediate hit might be harder, the path forward for New Zealand is more optimistic than other parts of the world who are still grappling with the outbreak," he said.

4. We're now in the third quarter of 2020 - is the recession already over?

Economists expect quarterly GDP to have hit the lowest point in this cycle, but that the impacts of COVID-19 will continue until mid-2022.

"We expect this recession to only last over the first half of 2020. That said, we expect the effects of the outbreak to weigh on activity over the coming years," NZIER principal economist Christina Leung said.

Olsen said although the recession will technically be over in the September 2020 quarter, that doesn't mean consumer spending and business investment will bounce back to normal.

"It's saying things aren't getting worse, but conditions still remain in a harder position than before the pandemic hit," he said.

Economist Cameron Bagrie said the September quarter holds the promise of a bounce in activity. But he agrees with the consensus that it will take until mid-2022 for the economy to reach the same size as it was pre-COVID.

"I think this will be the low-point - that was an extreme scenario when we locked the economy down," Bagrie said.

"We're seeing an economy that's moving in fits and starts. GDP is about growth: it's going to take a long time to get that level," he said.

If the economy evolves as expected over the next few months, Olsen expects a bounce-back in activity in September and December. This will be reflected in a slightly smaller drop in annual GDP.  

5. Should I be worried?

The COVID-19 relief package, which has paid around $13.9 billion in wage subsidies, has helped to cushion the blow of the COVID-19 pandemic.

As wage subsidies and COVID-19 relief payments roll off and borders remain closed with zero net migration, economists expect unemployment to rise.

Treasury's pre-election and fiscal update (PREFU) released on Wednesday forecasts unemployment to reach its highest point of 7.7 percent in 2021, dropping to 5.3 percent in 2024.

Olsen expects the country to go through an adjustment period, where jobs and businesses are lost and new businesses pop up.  Rising unemployment is a concern, particularly for those looking for a new role.

"At the same time, we have a number of businesses still in a strong position and looking to forge a new path ahead," he said.

For households and families, the next few years are going to be a tough ride. Confidence will be a key driver for getting the economy back up and running. Support from business and households and Government will crucial to recovery.

"Those elements will tell us how quickly we can get the economy standing on its own two feet."