Did New Zealand really dip into recession this year? Not until unemployment starts to rise ... that's the measure that affects real people.
Analysis: Joanna and her workmates got the letter yesterday, inviting them to a meeting to discuss cuts. They knew it was coming, but that didn't make it any easier. "To be honest, it feels a bit overwhelming at the moment and I'm still processing," she says.
The consultation meetings with "affected staff" are happening across her organisation. "I don't know what to expect but anticipate it will be challenging," she says. "I've been speaking with frightened, anxious, confused, tearful colleagues."
For now, unemployment is still low – but that's little solace to people like Joanna. When so much talk of recession seems like economic fluff, these are the real faces of an impending downturn.
Finance Minister Grant Robertson gifted the Opposition a free hit, when he said the growth figures fitted the definition of a technical recession by the barest of margins.
READ MORE: * Economic scorecard set to deliver verdict on recession * Raw Politics: Goodbye Jacinda, hello recession
Christopher Luxon was quick to take it: "Today it was announced that New Zealand is in a recession," he tweeted late on Thursday night. "Let me be clear, Labour has badly mismanaged our economy."
The two were basing their characterisation of the economy on one of several rules of thumb put forward by economist Julius Shiskin, in 1974. His most popular was two consecutive quarters of declining gross domestic product.
Preliminary figures (which are usually reviewed up or down) found the economy shrunk 0.7 percent in the December 2022 quarter, and 0.1 percent in the March 2023 quarter. Even by Shiskin's widely-embraced definition, this is the least recessionary recession imaginable.
But Shiskin's is not the only definition. And it's not an official definition: neither Statistics NZ nor the Reserve Bank has characterised the country's GDP dip as a recession.
So when certain media headline their news reports, "it's official, New Zealand is in recession" ... it really isn't official at all.
This economic decline is like none before. Some might say every economic decline is different, but this one is particular remarkable in that it hasn't yet hit jobs in any dramatic way.
As the above chart shows, quarterly growth may have dipped below the line – but unemployment has remained steady at a low 3.4 percent.
More sophisticated measures
Unlike New Zealand, the United States and Europe do issue official verdicts when their economies enter recession – and they don't rely on two consecutive quarters of decline.
Similarly to New Zealand, the European economy contracted slightly in the last months of 2022 and the first three months of this year. But the job market is very strong, with unemployment at 6.5 percent, its lowest since the euro currency was introduced in 1999, and hardly consistent with a real recession.
The Euro Area Business Cycle Dating Committee, which uses employment as well as economic growth data in determining when a recession has occurred, found no recession at its last assessment on March 27 and will revisit the question in November.
"No credible economist that I know defines a recession as two negative quarters. People who adopt that approach are either lazy thinkers or downright stupid." – Prof Arthur Grimes
Similarly in the US, the disconnect between GDP and the jobs numbers has brought some talk of a "jobful recession" (a play on the '"jobless recovery" of the late 1930s) – but officially, there is no recession.
The Washington Post says the "more or less formal definition" of a recession is whatever the Business Cycle Dating Committee of the not-for-profit National Bureau of Economic Research says it is. So far the eight economics professors on the committee have not made that call.
The bureau says a recession is:
"A significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales. A recession begins just after the economy reaches a peak of activity and ends as the economy reaches its trough. Between trough and peak, the economy is in an expansion. Expansion is the normal state of the economy; most recessions are brief and they have been rare in recent decades.”
As two of the committee's members, Christina Romer and David Romer, wrote in a 2020 paper, the chief metrics the committee has considered in making recession determinations in recent decades have also included real manufacturing and trade sales. Among monthly indicators, employment and real personal income are considered the broadest and most reliable.
Rethinking recession in NZ
CTU economist Craig Renney says Newsroom is "absolutely right" to question whether or not GDP is a good measure of whether an economy is in recession.
The International Monetary Fund notes that “There is no official definition of recession, but there is general recognition that the term refers to a period of decline in economic activity”.
Shiskin's opinion on what constitutes recession is just that – an opinion. "There is nothing scientific about it, nor is there anything rational about it. It’s just a rule of thumb."
"The unemployment rate is a measure of slack or excess capacity, and material changes in that variable have proved to be good indicators of something that matters changing in lived experience – notably difficulty in finding work." – Michael Reddell, economics consultant
Furthermore, economists rely on historic data to define a recession. If indeed New Zealand was in recession, it was in the early part of October 2022 to March 2023. Now we're into winter and approaching the latter half of 2023, so how meaningful is it to wail about a recession which happened in the past?
"Economics is often described as driving using only the rearview mirror," Renney says. "Adding to this complexity is that we don’t wait long enough to call a recession – often data is revised after initial publication and so recessions turn out not to be real."
Unemployment is a more meaningful measure, to most people. But there is a difficulty when it comes to placing greater weight on unemployment – New Zealand's data lags there as well.
Renney says the US definition has the benefit of being much more sophisticated – but much harder to tell the public. "It’s also arbitrary but in a different way – it is up to sage economists to work out if you are in recession."
Is there a better way to measure a recession?
According to Professor Arthur Grimes, a former Reserve Bank chair who's now at Victoria University's School of Government, the Shiskin definition makes no sense. "No credible economist that I know defines a recession as two negative quarters," he says. "People who adopt that approach are either lazy thinkers or downright stupid."
Economists spoken to by Newsroom prefer the so-called Sahm Rule, named after former Federal Reserve economist Claudia Sahm. This says the start of a recession is when the three-month moving average of the national unemployment rate rises by 0.5 percentage points or more, relative to its low during the previous 12 months.
Renney says: "This has the benefit of giving a very low level of false positives, and concentrates rightly on unemployment rather than output."
Citing Professor Robert McCulloch, he says: "Unemployment has a much more enduring and deeper wellbeing impact than inflation. Measuring our economic performance against the things that matter like unemployment or child poverty would be a much better place to start understanding if we are in a recession – rather than GDP."
Michael Reddell, another former Reserve Bank advisor, says once unemployment has risen 0.5 percentage points, it is likely to keep rising. "And it is pretty safe to conclude things are turning down overall," he adds.
"Something like the Sahm Rule has intuitive appeal because the unemployment rate is a measure of slack or excess capacity, and material changes in that variable have proved to be good indicators of something that matters changing in lived experience – notably difficulty in finding work."
"Calling something a recession doesn’t help us understand anything, nor does it provide any new policy tools to deal with economic problems." – Craig Renney, CTU
Reddell cautions against falling for the line, from some fair-weather politicians, that we can't be in a recession when unemployment is still low. Of course we can, he says. Recessions have to start somewhere – what matters is the direction and magnitude of change.
But the difficulty with unemployment as an indicator, again, is timeliness. Unemployment lags an economic downturn; employers don't start laying off people till they have no choice.
Reddell says it would help if New Zealand invested more in Statistics NZ's Household Labour Force Survey. "We are one of hardly any advanced countries with only quarterly unemployment data, and since the data are collected in person or by phone during the quarter it is almost beyond belief that processing and release still takes five weeks."
What's in a word
Craig Renney says the question we should be asking is, how useful is it to measure a recession in the first place?
Let’s take an example from economic history. The UK had a boom period during the late 1980s – the Lawson Boom. London and the surrounding areas thrived, and the economy overall was growing strongly as a consequence of oil money and financial services. But other parts of the UK were stuck in a decade-long economic collapse.
"We didn’t call it a recession – because GDP rose consistently. But it certainly was one of the biggest economic depressions in European history at the same time. Calling it one way or another wouldn’t have helped."
Similarly in New Zealand, whether we apply the word "recession" or not means little to someone who's just lost their job.
"Calling something a recession doesn’t help us understand anything, nor does it provide any new policy tools to deal with economic problems."
