People are talking insistently about recession in New Zealand. Driving the recent spate of concerns is the deterioration in consumer confidence over the last three months. All three of the indicators we follow (Colmar Brunton, Roy Morgan, and Westpac McDermott-Miller) have shown a significant deterioration in consumer sentiment since the start of 2008.
Now a small part of this decline is seasonal – however even taking this into account, there has been a worsening in consumers current financial situation and a significant fall in consumer expectations of their financial situation over the next 12 months.
Both the Hive and Roy Morgan state that the Reserve Bank needs to look at cutting rates, in order to avoid a recession we don’t need. However this raises the question, do we need a recession?
People appear to be viciously scared of a potential recession, viewing a slowing in economic growth (or even a slight contraction as BNZ sees it) as the end of the world. While this could be some form of extreme loss aversion from people in the community, I expect that people have asymmetric information, and the media is in turn exaggerating what a recession implies.
A recent article by Robert Samuelson covers the same types of issue (h.t. Mankiw). Thinking about the New Zealand situation, we have record low unemployment, the strongest terms of trade since June 1974, and a strong fiscal situation. Say that consumption tanks, interest rates swell, unemployment is unlikely to go past 5% – only 5%. If you had told me back in 2002, or even better 1992, that 5% was a high rate of unemployment I would have been perplexed to say the least.
Even in the RBNZ forecasts imply consumption growth of only 0.8%pa over the year to March 2009 – suggesting that there will be a massive slowdown in domestic economic activity from the est. 3.1%pa growth in consumption over the year to March 2008 (although not a recession). They are talking about 10% reductions in house prices, interest rates elevated until late-2009, and a reversion in commodity prices – and they still expect that they will have to keep the OCR elevated until late-2009.
If the Bank believes that, even skirting a recession we need a high OCR to suppress inflationary pressure and support long-term growth, then I believe that a recession may even be necessary in order to control the inflation problem. (Note: People love to blame tradable inflation, but non-tradable inflation is over 3% while inflation expectations are touching the top of the RBNZ target band – implying that we are at a point where “looking past” short term inflationary pressures is becoming inappropriate).
But again, what is a recession – a couple of quarters of negative economic growth. If thats the cost of ensuring a stable environment for future investment and trading decisions I think it is worthwhile.