Listener 1 August 1998.
Keywords: Macroeconomics & Money; Political Economy & History;
The Governor of the Reserve Bank finished a recent speech with “the sharp downturn in may of our export markets may well turn out to be the most serious shock to it the New Zealand economy since the oil shock of the seventies.” Here is a summary of the main shocks and recessions over our economic history.
The traditional Maori economy did not suffer recessions, because it was a barter economy isolated from the world. There were harvest booms and slumps because of supply changes, but not demand driven fluctuations. European contact brought a monetary economy and international trade, which affected the barter economy. The Maori planted crops to provision visiting whaling and sealing ships. In some years Northern Hemisphere monetary tumult meant the shipowners could not afford to send them, and the commercial crops wasted.
Perhaps New Zealand was born in depression for Australia, from whence it was first governed, was depressed in the 1840s. Most early settlements initially struggled, although Canterbury was fortunate because of the 1850s Victorian gold rush. Local gold rushes and the land wars gave prosperity in the early 1860s, but by the end of the 1860s the national economy was in recession. The 25 year “Long Depression” lasted until the early 1890s. There was a speculative boom in the 1870s from Vogel’s borrowing, which ended following the collapse of the Bank of Glasgow in 1878, when the London market withdrew its colonial investments. There were, as there are today, regional differences. Auckland was hooked into to the Sydney economy and struggled along a bit longer, but by the late 1880s New Zealand was thoroughly depressed.
Prosperity returned in the 1890s as overseas prices recovered, and frozen meat (and later dairy products) exports developed. The expansion phase of the boom lasted to the mid 1900s, and then slowed down, resulting in industrial strife such as at Blackball in 1908 and Waihi in 1913. Growth continued through the First World War but it was with world induced inflation.
Immediately after, import prices rose sharply, triggering a sharp (but mercifully short) contraction in 1921. The 1920s were a period of sluggish growth because of poor export prices. They crashed at the end of the decade precipitating the “Great Depression”. The downturn was not as deep as in 1921. But was longer and after a period of stagnation, so the earlier pain is largely forgotten.
Thereafter New Zealand had its greatest period of sustained growth: a strong expansion phase in the decade from 1934 when volume GDP grew at 7 percent p.a. (comparable to 1980s East Asian growth rates), followed by 20 years averaging over 4 percent p.a., (with cyclical ups and downs).
A major factor in sustaining this high growth rate was good prices for New Zealand exports. The 32 year boom ended in late 1966, with the collapse of wool prices. New Zealand then went through an 11 year transition phase of slow growth and rising unemployment, obscured by the world commodity boom of 1972 which burst in the 1973 oil price shock. Financial markets collapsed (as they do about once a decade) but not as noticeably as in 1987.
The world economy grew slowly from the mid 1970s, and by 1978 New Zealand was growing faster, continuing to do so when the world economy expanded in the early 1980s. The New Zealand boom ended in 1985, as the real exchange rate rose, cutting off export expansion. Fortunately the world continued to grow, so what could have been another long local depression was only a recession. The new National governments spending cuts in 1991 generated the sharpest contraction in the postwar era. But in 1992 New Zealand at last hooked into a world growth boom. It lasted about 5 years, the third longest post war boom. It ended in early 1997, and the economy has been struggling since, with some sectors and regions doing well, others in difficulties.
Today much of New Zealand is already in a recession, whose extent will depend on the length and depth of the East Asian recession (depression?), and the way the rest of the world is affected. I am inclined to agree with the Reserve Bank. The recession may be longer than most think, but possibly obscured by a boomlet around the time of the next election.
What is a Recession?
“A recession is when you haven’t got a job, a depression is when I haven’t.”
The Penguin Dictionary of Economics begins “an imprecise term given to a sharp slow-down in the rate of economic growth or a modest decline in economic activity, as distinct from a slump or depression which is a more severe and prolonged downturn.”
The US National Bureau of Economic Research identifies a recession when there is a volume GDP decline for two successive quarters. This is not an “official” definition, and it certainly does not apply to New Zealand for our GDP data is too subject to error. This is not a failing of Statistics New Zealand, but a consequence of the New Zealand economy being too small to fully benefit from the law of large numbers. If it were true then New Zealand would have had 4 recessions in the last 10 years.