Trajectory of a recession depends on the direction NZ chooses

How will New Zealand emerge from our cost-of-living crisis and impending recession?

It’s a big question, and it rests on the ideological stance of the Government and what we support.

Europe versus America in the 2008 Global Financial Crisis is a different, but worthy case study to reflect on.

Our own government needs to start making it very clear what ideology it intends to follow.

Micro focus

As individuals with different wage levels, family sizes and mortgages, we all have a unique view on how the next couple of years will affect us.

But we are where we are.

Inflation is high, but not rampant. Employment is high. Trying to limit wage rounds right now is a toothpaste-back-in-the-tube game. Move on.

The objective is to get ahead of the curve and change expectations, so the next cycle is less. This round needs to be paid.

You will hear noise about spirals and losing control. A few twists have to happen I’m afraid as the objective is to reach a peak quickly and change the gradient of the spiral. Wages simply have to rise, or we end up with a spiral of social costs. There is a counter-balancing human price to everything.

Inflation rarely comes to an overnight halt so don’t expect the wage pressure to either. It’s all part of a normal, but major structural shift in the economy and destined to be a two to three year chapter in a decade long tale. Some countries have made better local decisions than us, but that can’t be unwound now.

The European and United States duology

If there was ever a time in recent history where the ‘macro’ actions of our Government and Reserve Bank were going to affect our personal finances, we have arrived.

Looking back to the Global Financial Crisis of 2008, when the banking system had mass bail-outs, governments printed money to fund it. Known as QE or Quantitative Easing, each central bank magicked up a bond on their own balance sheet and produced some electronic money on the other side of the accounts.

The increase in the money supply went unnoticed by ordinary workers as inflation didn’t happen. Yet it did. It came in the form of house prices and share prices going up dramatically over the next 10 years. Asset owners experienced a boom and the people without savings couldn’t see the inflation.

Gosh, what wasn’t to like about that nifty game of QE?

When the pandemic struck, we thought we might get away with that sort of bail out again. This time it wasn’t banks we were saving, but businesses, workers and their jobs. It felt more altruistic.

The money printing of 2008-2014 was a pimple compared to the bazooka of 2020-2021. The cash went into different hands.

Asset price inflation still took hold, but inflation spread wider, thanks to ongoing supply issues with sick workers and the Ukraine war. Proper consumer price inflation is here and it brings far bigger social problems. Efforts to cool it, look destined to end in a recession for many countries. Negative growth for two quarters constitutes an economic recession.

Back in 2008 the US and Europe had vastly different ideologies in how they dealt with the unfolding decline. The US won.

America spent into the crisis. It took what’s known as a ‘Keynesian’ approach (after the economist John Maynard Keynes). If you stop unemployment, and stimulate consumption and demand, the economy will grow. The idea is to stop a negative spiral of confidence, where lower spending, job losses and bankruptcy cause growth to stall and the tax-take to go down.

Former US president Barack Obama used large stimulus packages and big investments into key industries. The American recession was short-lived and the economy grew.

On the flip side the Europeans became ‘Austerions’. It was a new label for austerity (being tight with money). Nobel laureate Paul Krugman was behind this one. They wanted to reduce the size of the European welfare state as it was deemed unaffordable.

The European Central Bank, the International Monetary Fund and the European Commission, the trio known as the Troika, all supported it. Some countries such as Germany fared OK, but Ireland, Greece, Spain and Portugal ended up in dire straits. Growth in the UK stalled in 2010 with austerity packages.

Austerity also had a domino effect within their health systems. Suicide rates rose for some countries, hospital capacity reduced, those with chronic disease were unable to access the best medicines and there was even a rise in HIV in Greece caused by increased drug use.

Social consequences don’t repair at the same speed as economies and have a horrific toll at an individual level.

Europe is structurally mangled, with unemployment taking the place of a currency that can’t depreciate and appreciate between countries. It is far from being the United States of Europe. War is on the door step and it’s very likely we will see a repeat of poor performance in a new recession.

What will New Zealand choose?

It comes down to the political ideology of the Government to decide what sway it puts on Keynesian, Neo Liberal, Austerion, or Monetarist policies if we enter a recession.

As we can see with the European experiment, the trajectory and depth of a crisis can be very different. An intellectual case can be made for most theories, but all outcomes won’t be equal.

There’s a good case for getting behind responsible government spending with a growth focus. Correcting our long-term under-investment in the health system will also be crucial. Our debt levels will have to be taken care of more slowly over time.

A period of recession in New Zealand does feel inevitable, but the trajectory clearly isn’t.

Janine Starks is the author of www.moneytips.nz and can be contacted at moneytips.nz@gmail.com. She is a financial commentator with expertise in banking, personal finance and funds management. Opinions are a personal view and general in nature. They are not a recommendation for any individual to buy or sell a financial product. Readers should always seek specific independent financial advice appropriate to their own circumstances.