Recessions explained

There's a lot of talk right now about a recession. What does this term mean and how might it affect you? 

In February 2023, economic consultancy Infometrics issued a prediction that "the New Zealand economy is heading for a well-signalled recession this year" and a prolonged contraction in the economy lasting until early 2024. 

This comes as a result of rapid interest rate rises, labour shortages and a faltering housing market, which have slowed down the economy. 

What is a recession?

A recession is when gross domestic product (GDP), a measure of how much value is produced in an economy, decreases for two consecutive quarters. There are other definitions but they all have the same thing in common - negative economic growth. 

Typically this is accompanied by a rising unemployment rate, slower wage growth and a decline in consumer spending. Sense Partners Economist Shamubeel Eaqub explained to RNZ that there’s another way to define recession:

"... When people get so scared of doing things, they don't hire, they don't invest, and they don't spend.

"And that collective sitting on hands is really what recession is about."

What causes a recession?

The Reserve Bank of New Zealand tries to keep inflation between 1-3%. In 2022, inflation averaged at 7.2%, much higher than this target. The resulting high food, fuel and energy prices made life difficult for Kiwi households and have caused what's being dubbed a "cost of living crisis." 

To get inflation under control, the Reserve Bank has been increasing the Official Cash Rate (OCR). This is a wholesale interest rate that affects mortgage interest rates as well as savings rates. When the OCR increases, banks and lenders may pass this on to their customers, meaning interest rates on mortgages increase as a result, and homeowners have less to spend after making their mortgage repayments. 

As a result of this, consumer spending generally decreases and businesses experience lower sales, which both slows down GDP growth and inflation. 

New Zealand's GDP fell by 0.6% in the December 2022 quarter after a rise the quarter before, which is why you'll be hearing a lot of talk about recession at the moment. 

How could a recession affect me?

Chances are you’ve probably been around for a couple of recessions. There was a year long recession in 2008-2009 caused by the global financial crisis, another in 2010 caused by drought and another brief recession in 2020 as the country adapted to the shock of COVID-19 and lockdowns. 

So, we've been here before. Should you be worried this time around? 

The recession will particularly affect those on low incomes, or those who overextended their finances to buy a home in 2021 or 2022. Well over half of homeowners are expected to roll over onto higher interest rates in 2023, which will likely deepen the recession. 

Meanwhile, inflation will continue to squeeze household budgets through 2023, experts are predicting mortgage rates may continue to increase until early 2024, house prices could continue to fall and unemployment may increase throughout the year.

This all sounds like bad news - and it is - but the fact is, New Zealand’s recession is expected to be shallow and short and could end as soon as 2024.

How to get recession ready

Here are five simple tips for Kiwis concerned about their finances at this time:

• Turn thinking into action: Look at and manage your day-to-day expenses over this time.
• Bump up that rainy day fund: Check out if you have a rainy-day fund set aside and identify how long this would cover your household bills each month.
• Make a plan to navigate interest rate rises: If you have a fixed rate mortgage, check when it will end, and how much extra you will need to find on a monthly basis – then make a plan with your financial adviser on how you’ll get there.
• Talk to someone else: If you have concerns or questions talk to your mortgage provider, insurer, KiwiSaver provider, fund manager or financial adviser.
• Stay informed: Upskill yourself on financial know-how via podcasts, books and other resources to get quick tips and ways you can navigate these challenging times. Here are a few to get you started.

Disclaimer: