Was that really a recession?

New Zealand’s gross domestic product (GDP) declined in the three months to March 2023, making for the second consecutive quarter of contraction.

Since these figures were released last month it’s been widely reported that the New Zealand economy has experienced a recession.

I’m not sure I agree with that, because I don’t believe the contraction was big enough or the weakness widespread enough.

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That doesn’t mean I think the economy is in great shape. It’s just that a fall of 0.7 per cent followed by a decline of 0.1 per cent doesn’t quite count as a recession.

Those who’ve lived through downturns of the early or late 1990s, as well as the GFC 15 years ago, will no doubt agree.

GDP is the total aggregate value of all the finished goods and services produced within a country in a specific timeframe, which is usually three months.

It measures everything we have produced, after adjusting for inflation, which means it gives a fairly good scorecard of the country’s economic health.

When GDP is rising from one quarter to the next, as is the case most of the time, the economy is growing. When it falls, the economy is contracting, in the sense that our total output is shrinking.

However, it’s a common misconception – even among some market professionals – that two quarters of declining GDP alone constitutes a recession.

It’s unclear where this rule of thumb came from.

Some have pointed to a 1974 article in the New York Times, which provided a list of recession-spotting guidelines.

This particular one seems to have stuck and become part of market folklore, possibly because it’s simple and straightforward.

In truth, it takes more than a basic two quarters of contraction to constitute a recession.

The National Bureau of Economic Research (NBER) in the US has been researching business cycles for close to 100 years.

It has become the authority on monitoring economic fluctuations in the world’s biggest economy, and identifying the beginning and end of recessions and recoveries.

The NBER considers three criteria to determine if a recession has taken place – depth, diffusion and duration.

That means it needs to see a significant decline in economic activity (depth) that is spread across the economy (diffusion) and lasts more than just a few months (duration).

There will always be exceptions, such as the recession of early 2020 during the initial outbreak of COVID-19.

That downturn lasted just two months, but because the drop in activity was so great and so widespread the NBER declared it a recession.

Here in New Zealand, the two quarters of declining output we’ve seen is long enough to be considered a recession, but the quantum of the decline is too shallow (at less than one per cent), and the weakness hasn’t been widespread enough.

Sectors that are very sensitive to interest rate changes, like construction, have suffered a lot. However, many others have merely been subdued, while some have continued to flourish.

That doesn’t mean we’re out of the woods though.

The economy has slowed, mortgage rates are at 15-year highs and Reserve Bank projections suggest unemployment will rise from 3.4 per cent to 5.4 per cent over the next 18 months.

While these forecasts could prove incorrect, it’s hard to see unemployment rising that much without a recession occurring.

Recessions are a natural, expected part of the business cycle for all market-based economies. They’re also, without exception, followed by recoveries.

There’s every chance (although it’s not an inevitability) we experience a recession over the coming year, but the slowdown of late 2022 and early 2023 doesn’t make the cut.

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