Published in the NZ Herald, 1 July 1998, as "What Depression; we've been in worse shape often enough".

© 1998 New Zealand Herald

response by Owen McShane, National Business Review, 7 August 1998

Recession and Depression in Context

Keith Rankin, 29 June 1998


Friday's (26 June) release of the GDP statistic for the first three months of 1998 has been greeted with much gloomy media reaction. One news bulletin that I saw claimed that not only are we entering a recession but we may be even moving into depression.

These claims reflect popular and media cynicism (not unlike that of 1983) much more than they represent an accurate evaluation of our national economy. As was the case 15 years ago, the unremittingly negative opposition towards the Treasurer, from both left and right, is playing into the hands of the liberalisers and privatisers on the far right, who still have plenty of unfinished business.

What has happened this year? Seasonally adjusted production in January-March is down by 0.9 percent on October-December. Sixty percent of that decline is in the drought-stricken agricultural sector. There was a similar but smaller decline a year ago.

Given the drought, the Auckland power crisis, and reduced spending in Asia, the -0.9% actually represents a resilient performance by the New Zealand economy. Activity is up 1.5 percent on January-March 1997, and value-added in agriculture is 7.7 percent up on the first quarter of 1996.

With the New Zealand dollar now at its correct level and with good recent data on investment, the signs are favourable for renewed growth to the year 2000; that is, if the Government doesn't panic by adding to the perception that we are in the midst of a domestic economic crisis.

Economic malaise can be self-fulfilling. For example, the Japanese crisis is being made very much worse by reduced spending in Japan. The central problem that we do have - the accumulated balance of payments deficit - is a legacy of the Douglas/Caygill/Richardson era. It has nothing to do with Peters, Shipley or MMP.

Table 1, using index numbers based on 1985, shows that there was no net increase in GDP between December 1985 and December 1991. Essentially, New Zealand was in a recession that lasted six years, with 1990 and 1991 showing the characteristics of depression.

For four years from 1985 to 1989 we experienced minuscule economic growth, zero export growth, but an increase in import volumes of over 50 percent. That is the source of the balance of payments problem that has plagued us in the 1990s. An import blowout during a recession is very unusual, yet that is what Sir Roger Douglas gave us.

In the depression phase (1990-91), exports jumped while imports plummeted. That is normal for a national depression. It is what is happening in Asia at present.

The recovery of the New Zealand economy began in 1992, and it is still going. The hiccup in 1997 is clearly revealed, not through the GDP data, but through a halt in export growth. Thanks to the emerging depression in Asia, New Zealand's exports barely grew while import growth continued.

The correction to the 1997 hiccup has already taken place, in the form of a 20 percent depreciation of our formerly overvalued dollar.

Table 2 shows how New Zealand has responded to economic depressions in the past. I am defining "depressions" as periods in which GDP declines for at least two years, and fails to recover by the end of the third. New Zealand has been through three depressions since 1929: 1929-33, 1975-78, and 1989-92.

The deepest depression by far was that of the early 1930s. It was followed by the strongest recovery and expansion this century. By March 1939, production was 36 percent up on pre-depression levels. The turnaround was triggered by a large devaluation of the New Zealand pound in January 1933, and was helped by the accession of the pragmatic Gordon Coates to the Treasury, replacing the ideological William Downie Stewart who resigned in opposition to the decision to devalue.

The recovery in the 1930s was made possible by expenditure increases in Britain and New Zealand, and it proceeded in the face of an international recession in 1937 that was comparable to the Asian problem today. In many countries, and especially in the USA, the 1937 recession was regarded as the second-wind of the Great Depression.

The pattern of recovery in the early-1980s and late-1990s is comparable to that of the 1930s. In the 1975-84 period, the second phase of the international crisis was more severe than the first phase. Thus, while the 1970s' depression was less severe, the recovery was much slower.

The world downturn at the beginning of the 1990s was modest by the standards of its predecessors. It was more significant here, because it followed four years of recession and an import blow-out.

Despite the seriousness of the 1991 crisis, the 1990s' recovery has proved to be similar to the others. All of the recoveries have revealed a resilience in New Zealanders' response to crisis.

The legacy of many years of importing goods that we didn't pay for has meant that we must now produce more than we consume. Recent statistics suggest that we are coping with this challenge. We are weathering the Asian crisis and the drought.

There is no need for a rightward domestic response to international events. Indeed, a budget deficit for a year or two is nothing to fear. It is a part of allowing the market's own stabilisers to work.

It is interesting to note that the worst single-quarter GDP statistic in the last 20 years came in December 1986. In that quarter, seasonally adjusted GDP fell by over three percent, and it was not until June 1993 that the September 1996 level of activity was exceeded. Did we notice in 1987? Not really. We were too busy congratulating ourselves over our America's Cup performance in Fremantle. Did the government panic? Yes. High interest rates and a precipitate budget surplus helped to induce an economic crisis that could easily have been averted.


response by Owen McShane, National Business Review, 7 August 1998


© 1998   Keith Rankin

Rankin File