Brian Easton: The Post-Covid Economy

Is the economy in another long stagnation? If so, why?

This is about the time that the Treasury will be locking up its economic forecasts to be published in the 2024 Budget Economic and Fiscal Update (BEFU) on budget day, 30 May. I am not privy to what they will be (I will report on them in due course) but the Treasury are competent economists persuaded by the evidence, so other economists should be able to make reasonable guesses at what is bothering them

Probably the economy is in a state of stagnation. I come to this conclusion on a slightly different basis from the news headlines – gone the day after – which we are all fed. First, I use per capita GDP as a measure rather than aggregate GDP. I got into that habit when I was writing an economic history of New Zealand because population growth in some periods dominated market economic activity (I use GDP well aware of its limitations both in content and sustainability; that is what the news headlines use.) Second, I do not use mechanical definitions of stagnation and recession because I am too aware of the measurement noise in the estimates (which are a proportionally bigger problem in a small economy like New Zealand than in a huge economy like the US which the news headlines tend to imitate). Those who lack economic and statistical judgement should stick with mechanical definitions.

The statistical record is that GDP per capita grew at about 1.6 percent p.a. between end-2010 and end-2019. Then the economy went into turbulence during the Covid nationwide lockdown of the first half of 2020. Since then, it has hardly grown at all. Sure, there have been ups and downs but eyeballing the chart, per capita GDP looks flat. End-quarter-2023 GDP per capita, which is that latest figure we have, is only fractionally above end-2019. The growth rate since then has been about a tenth of the pre-Covid growth rate at 0.16 percent.

Treasury’s 2023 Half Yearly Economic and Fiscal Update (HYEFU), locked up in November 2023, forecast that per capita GDP would fall in the three years to June 2025. The forecast seemed to imply that the economy will not to return to the end-2019 level until early 2026. As I say, I have not seen the Treasury’s current forecasts but most of the economic news since November has been pessimistic, so it may be the Treasury will now be expecting the end-2026 level to be much the same as seven years earlier.

In the past I have treated such a seven-year stagnation as significant. It amounts to double the length of the traditional standard business cycle of the New Zealand economy, although it is shorter than the past major stagnations:

- the Long Depression (1878 to about 1896 –18 years);

- the Interwar Recession including the Great Depression (1908 to 1935 – 27 years);

- the Post-War Stagnation (1944 to 1953 – 9 years);

- the Wool Price Crash (1966 to 1978 – 12 years);

- the Rogernomics Recession (1985 and 1995 –10 years).

(You can read more about them in the appendix of my Not in Narrow Seas: The Economic History of Aotearoa New Zealand.)

What is causing this stagnation? I discount political explanations as superficial. It looks as though this stagnation is going to straddle both the stewardship of Labour’s Grant Robertson and of National’s Nicola Willis. The negligible growth rate made it politically and fiscally difficult for Labour and is making it similarly difficult for National. Were the economy on its pre-2019 trend, the government’s revenue would be up an additional 6 percent. Even if the Coalition Government’s policies – such as the infrastructure spend – boost the long-term growth rate, their significant impact will be beyond the time horizon with which this column is concerned.

A possible explanation is Reserve Bank actions. In November 2022 a select committee asked the RBNZ Governor whether the central bank was deliberately engineering a recession to combat inflation. He answered ‘I think that is correct. We are deliberately trying to slow aggregate spending in the economy. The quicker inflation expectations come down, the less work we need to do and the less likely it is that we have a prolonged period of low or negative growth.’

The difficulty with that explanation is that the economy seems to have already been in stagnation before the RBNZ took its action, Nor is one sure that Governor Orr expected his induced recession to last as long as even three years. Still, it is reasonable to suggest that the RBNZ measures to stifle inflation have contributed to prolonging the stagnation. (Or, as it might argue, that it has been the reluctance of players in the economy to get their expectations down.)

Undoubtedly, the beginning of the stagnation is to do with the onset of the Covid pandemic. Unfortunately, the measurement system which underpins our National Accounts was not designed to deal with this sort of shock. But even if we start the analysis at end-2020, when the initial shock was over, we still seem to be facing around six years of stagnation.

The international post-Covid economy has not been doing well. (And probably worse than the 2023 HYEFU assumed, which is one of the reasons the forecasts in the 2024 BEFU may be wound back.) It has also been a major source of the inflationary pressures that the RBNZ has been trying to resist. Add to this heady brew the economic impacts of the invasions of Ukraine and Gaza (although wars usually add to economic activity as well as to inflationary pressures).

We also need to be mindful of the possibility of ‘secular stagnation’ among affluent countries – a long-term slowing down of the growth rate of their material production. Perhaps New Zealand is joining them. It will take a number of decades to be certain whether this is, or is not, happening.

The fact is that the New Zealand economy has now been stagnating longer than one standard business cycle. The expectation is that it will continue to do so. Before proposing policies to boost the sustainable growth rate, there is a need to explain systematically why the New Zealand economy appears to be stagnating. Treasury’s 2024 BEFU should give us further insights.

Brian Easton is an economist and historian from New Zealand. He was the economics columnist for the New Zealand Listener magazine for 37 years. This article was first published HERE