Cost of living: How people can get themselves financially ready for a recession

With New Zealand's inflation at a three-decade high and interest rates rising, many Kiwis are being forced to stretch their hard-earned cash as far as possible - as prices for petrol and food skyrocket.

The Reserve Bank delivered its biggest-ever official cash rate (OCR) hike on Wednesday as it tries to tame stubbornly high inflation. The RBNZ raised the OCR by 75 basis points to 4.25 percent, the highest it's been since 2008. RBNZ has now added 400 basis points to the OCR since October last year.

And, in what made for grim reading, the RBNZ's monetary policy statement predicted a recession in the middle of next year and forecast the OCR peaking at 5.5 percent.

"This economic contraction will, in part, be a result of higher interest rates, as the Reserve Bank acts to reduce inflation and return employment to a more sustainable level," the statement said.

"It will, therefore, differ from contractions experienced in New Zealand in recent decades when poor economic outlooks, often related to international conditions such as those during the global financial crisis, were cushioned by lower interest rates."

But, while New Zealand is going through a "difficult period" when it comes to inflation and the cost of living, as put by Finance Minister Grant Robertson, Kiwis are being told not to panic even though a recession could be on the cards.  

"Recessions don't impact significantly on most people," said Katrina Shanks, the chief executive of Financial Advice NZ. "I think what it does is it causes a bit of fear and caution for people but, for most people, it's not too bad."

Shanks told Newshub there was no need for people to make rash decisions when it came to their investments.

"What we say is: stay invested," she said, adding people should "look at their risk appetite, look at your strategy - make sure it's right for you.

"Don't have a knee-jerk reaction if the market's moving on you… you need to understand when you're going to need that money in the future, and that's what your reaction will be to a changing market - especially a volatile one," Shanks said.

What is a recession?

Before we get to the advice - first, a bit of background. 

A recession is when there are two successive quarters of negative growth. New Zealand's gross domestic product (GDP) fell 0.2 percent in the first quarter of this year but avoided a recession when Stats NZ revealed a 1.7 percent growth in GDP for the second quarter.

During the severe economic downturn in 2008-2009, commonly known as the Global Financial Crisis (GFC), New Zealand's GDP contracted for six quarters in a row.

Shanks noted New Zealand's unemployment rate - 3.3 percent - was very low. That's in contrast to the 6.8 percent rate at the end of 2009.

"Normally in a recession, you would see unemployment rise and that would be really hard to imagine in New Zealand at the moment," she said. "That's quite unique in what normally would happen in a recession."

Cost of living: How people can get themselves financially ready for a recession
Photo credit: International Monetary Fund

How does New Zealand's GDP compare globally? Are there countries already in recession? 

To put New Zealand's economy into a global context, Australia's economy grew 0.8 percent in the first quarter of this year - the same period in which ours shrunk by 0.2 percent.

In the UK, the economy looks grim. Its central bank warned in August Britain was facing a long recession even as its surging inflation was on track to top 13 percent.

The US, meanwhile, was also teetering on the brink of a recession as its economy unexpectedly contracted by 0.9 percent in the second quarter of this year.

Overall, the International Monetary Fund estimates global GDP shrunk in the second quarter of 2022 and the probability of global recession had increased.

"A tentative recovery in 2021 has been followed by increasingly gloomy developments in 2022 as risks began to materialise," it said in its latest World Economic Outlook. "Global output contracted in the second quarter of this year, owing to downturns in China and Russia, while US consumer spending undershot expectations. 

"The baseline forecast is for growth to slow from 6.1 percent last year to 3.2 percent in 2022, 0.4 percentage points lower than in the April 2022 World Economic Outlook." 

What can we do to prepare? (h2)

Shanks said it was important for people not to get scared and continue spending money, where possible.

"In a recession, what you do see is… individuals stop spending, you see businesses stop investing, they stop borrowing, they cut back on expenses and that's the effect of a recession, and we don't want to force a recession by having those behaviours before it comes - if it was to come."

While people shouldn't panic, there were several measures people worried about a recession could take, Shanks said.

"Think a bit more about things like… building up your emergency fund, paying down your debt, staying invested.

"You should be looking at ensuring that your income's working for you - [for] many people, every day, every week, every month - money just seems to disappear and that's their hard-earned income disappearing. So it's about understanding what's essential, what's not essential, having a budget, having goals… and monitoring those to make sure you haven't got money wasted."

Financial journalist and podcaster Frances Cook said people should hope for the best but plan for the worst.

"It's not a sure thing that we'll end up in recession, but preparing your money is always a good thing," she said. "Start by boosting your savings. Even an extra $20 a week into a savings account will get you $1000 in less than a year."

Cook said savings prevent people from going into more debt should unexpected costs - like car breakdowns - appear.

Like Shanks, Cook also recommended paying down debt.

"Interest rates are going up, and likely to keep going up, which is making debt more expensive by the day. You don't want to be stuck paying for what past you bought."

Ayesha Scott, a senior finance lecturer at the Auckland University of Technology who recently launched an online toolkit to help Kiwis have healthy conversations about their money, said people should talk to those around them about how to prepare for any changing circumstances. 

"With rising cost of living and budgets being squeezed, it's an opportunity to figure out where you're placed and have a chat to your partner/parent/child/flatmate about finances," Dr Scott said.

This article was first published on August 23 but was updated on November 27.