Introduction to Economic Downturn
Even if things go well from here, we’re going to get a series of ugly economic statistics between now and Christmas. There is always a sting in the tail of a downturn. Recessions usually save the worst for last, and when confidence is already low, the risk that grim headlines will undermine progress is heightened.
Understanding the Impact of Inflation
On Monday, we’ll get an inflation figure that is expected to breach the sacred 3% upper target for the Reserve Bank. This is not a surprise, as it’s a fundamental piece of economic theory that the more stuffed the economy is, the lower inflation goes. However, this theory breaks down when commodity prices outside domestic control push inflation up. This has happened this year with food and power prices, creating significant problems. In his inflation preview, ASB economist Mark Smith describes the cost-of-living spike this year as “the largest single headwind facing the household sector”. Food prices were up 5% in the year to June, and power prices were up 8.5%. Inflation in these areas is the worst because these are universal costs and non-discretionary – everyone pays.
The Silver Lining
The food commodity boom that has driven prices up will ultimately be good for the economy, bringing in billions of extra export dollars. However, unless you’re actually a farmer, it has brought a miserable combination of inflation and recessionary conditions (stagflation) for the rest of us. The good news is that the food price inflation looks to have peaked. The monthly Stats NZ Selected Price Index – which covers food, travel, and accommodation costs (about 46% of the total CPI) – showed food prices were down 0.4% for the month of September, taking the annual rate of food price rises to 4.1% – from 5% in the year to June.
The Road to Recovery
Monday’s number is already history. The Reserve Bank will look through it and cut the Official Cash Rate again in November. Economists are all picking inflation to fall from here. However, we should expect some more gruesome headlines on November 5 when we get the third-quarter labour-market data, which will almost certainly show a rise in unemployment. Unemployment is currently sitting at 5.2%, which is historically not particularly horrible, but is flattered by the record numbers of people leaving the labour market to either study or head overseas.
Unemployment and Underutilization
The rise of contract and freelance work is also making the topline unemployment rate look better than it is. There are large numbers of people who have some work (and so don’t officially qualify as unemployed) but who don’t have enough work to survive. The underutilisation rate (which captures underemployment and unemployment) was 12.8% in the year to June and much worse for younger age groups. For those aged 20-24 (in the June 2025 quarter), the underutilisation rate was 21.4%. However you cut the numbers, it is the trend in employment that is crucial to consumer confidence. The direction of travel needs to shift.
Navigating the Challenges Ahead
The third quarter most likely won’t represent that shift, sadly. The second-quarter GDP slump and accompanying fall in business confidence have raised the risk that firms have had to take another look at cutting staff numbers (or have delayed hiring plans). In fact, recent business confidence surveys have said as much. So even if the economy starts turning now, it’s not unreasonable to think unemployment won’t peak until early next year. That means we won’t see the worst unemployment numbers in the data until some time in the second quarter next year. This, unfortunately, is normal in economic recoveries. Unemployment data is a lagging indicator.
Staying Confident
Expect an intense media focus on third-quarter GDP, which is released on December 18. It’s quite possible that it could deliver an ugly recession headline just in time for Christmas. Hopefully, the third quarter wasn’t a complete write-off and will show some tepid growth. But between June and September, there wasn’t much domestic data to suggest we were in recovery. You’d expect some sort of rebound from that big fall in the second quarter. But it is plausible that we’ll see the second-quarter number revised up (there was a sizeable statistical quirk in the data). It will still be negative, and the third quarter may well be marginally negative. Boom! Two negative quarters … recession.
Conclusion
It won’t really tell us anything we didn’t know (autumn and winter sucked), but the “R” word is always big news. It will be politically very awkward for the Government, and there will be a frenzy of media debate. Don’t let the headlines rattle you. I’ve been repeating the theme of this column like a mantra because, at this point, the biggest risk to the recovery is a self-inflicted deficit of business and consumer confidence. We’re vulnerable to overplaying the negative headlines that are inevitably still to come this year. We need to retain some faith in the fundamentals of the New Zealand economy and the people who make it work. That’s us. We’re those people.
