The Times Australia
The Times World News

.
The Times Real Estate

.

Does fighting inflation always lead to recession? What 60 years of NZ data can tell us

  • Written by Michael Ryan, Teaching Fellow in Economics, University of Waikato
Does fighting inflation always lead to recession? What 60 years of NZ data can tell us

There is an ongoing global debate[1] over whether the high inflation seen in the aftermath of the COVID-19 pandemic can be lowered without a recession.

New Zealand is not immune to this issue. Reserve Bank governor Adrian Orr has said a recession is needed to tame inflation[2] – described as a “hard landing”. Others have disagreed, arguing New Zealand could and should aim for a soft landing[3] (a reduction of inflation with no recession).

But are reductions in inflation inextricably linked to recessions?

New Zealand’s own economic history, it turns out, can give some guidance on this, and point to the risk factors within the country’s economic outlook.

Are we in recession yet?

There is no hard and fast definition of a recession. The term “technical recession[4]” is widely used to refer to a period with two consecutive quarters of negative real growth in gross domestic product. By this measure, New Zealand entered a recession[5] at the end of last year.

But many economists prefer the alternative definition from the National Bureau of Economic Research (NBER[6]) in the United States: a recession is “the period between a peak of economic activity and its subsequent trough, or lowest point”.

Technical recessions and recessions meeting the NBER criteria do not always coincide[7].

Read more: Central banks say interest rates will stay high but it's unclear if this will be enough to curb inflation[8]

In 2014, two researchers used the Bry-Boschan algorithm[9], which is based on the NBER definition, to identify New Zealand’s recessions between 1947 and 2012.

The question is whether we can identify these recessions in real time rather than in hindsight. The so-called Sahm rule[10] stipulates a recession is likely when the unemployment rate starts to increase after recent lows, which can help with timely analysis of the economic conditions.

The dashed line in the graph below shows a recession indicator based on unemployment, dating back to 1986 when quarterly unemployment data was first published. The indicator usually coincides (within one quarter) with the start of a recession based on the Bry-Boschan algorithm.

According to this indicator, we were not in recession in the fourth quarter of 2023. However, if the rise in online job applications and fall in job ads[11] continues, this indicator might flash red soon.

The highs and lows of NZ inflation

Since 1961, New Zealand has experienced eight falls in inflation (disinflations[12]) of four percentage points or more. (Disinflation refers to when inflation drops but remains positive, while “deflation” occurs when the inflation rate falls below zero).

This four percentage point drop is required for New Zealand’s inflation to reach the Reserve Bank’s target of 1-3%, down from the 7.3% recorded in the third quarter of 2022.

Each letter in the graph above identifies the inflation peak before historical disinflation episodes. The shaded area identifies recessions up to 2012.

Read more: Degrowth isn't the same as a recession – it's an alternative to growing the economy forever[13]

The graph shows four drops in inflation – B, E, F and C – seem to be associated with recessions, while drops A, D and G were not. Disinflation G does have a recession quite late in the piece, the Asian Financial Crisis, but approximately half the inflation fall had already occurred before the crisis took hold.

The message is a positive one: a fall in inflation does not necessarily have to be associated with a recession.

But are any of the historical disinflation episodes more instructive than others about what might happen in the current situation?

Disinflations D and G, which were associated with soft landings, followed increases in short-term interest rates (such as New Zealand has recently experienced). Disinflation D was also helped by a halving in oil prices between November 1985 and March 1986.

Disinflation H is a bit of an anomaly. The inflation peak in 2011 was an artificial high as it came on the back of an increase in the goods and services tax[14] in 2010.

A common theme with hard landings

Turning to the hard landings in the sample, early 1974 saw a large increase in oil prices after the 1973 Arab-Israeli war. The resulting global recession, coupled with restrictive domestic fiscal policy to quell oil price-induced inflation, contributed to disinflation between the second quarter of 1976 and the fourth quarter of 1978 (marked B on the graph).

Disinflation F, between the second quarter of 1990 and the first quarter of 1992, again occurred against the backdrop of a slowdown in the world economy. This reflected, in part, the increase in oil prices in 1990 due the first Gulf War, and tight domestic monetary[15] and fiscal[16] policies.

Read more: Interest rates: if central banks don't start cutting them soon, it could actually increase inflation[17]

Disinflations B and F share similarities with New Zealand’s current situation, including restrictive (monetary) policy and unrest in the Middle East. Oil prices are up more than 15% this year[18], although they are yet to reach their mid-2022 highs.

Disinflations C and E were also associated with recessions reflecting global events. During deflation C, events in Iran led to an oil price increase, which both directly and through policy actions[19] sent the US into recession in the early 1980s.

Disinflation E coincided with the October 1987 sharemarket crash[20] which set off instability in New Zealand’s newly-liberalised financial system.

So if New Zealand is not currently in a recession, what are the country’s chances of avoiding one while trying to reduce inflation?

History suggests it is possible. But favourable global conditions are needed and, in particular, favourable geopolitics. Recent events in the Middle East, coupled with the ongoing war in Ukraine, are not positive signs.

References

  1. ^ ongoing global debate (www.reuters.com)
  2. ^ recession is needed to tame inflation (www.bloomberg.com)
  3. ^ aim for a soft landing (www.nzherald.co.nz)
  4. ^ technical recession (www.nzinitiative.org.nz)
  5. ^ New Zealand entered a recession (www.rnz.co.nz)
  6. ^ NBER (www.nber.org)
  7. ^ coincide (www.rba.gov.au)
  8. ^ Central banks say interest rates will stay high but it's unclear if this will be enough to curb inflation (theconversation.com)
  9. ^ Bry-Boschan algorithm (www.rbnz.govt.nz)
  10. ^ Sahm rule (fingfx.thomsonreuters.com)
  11. ^ rise in online job applications and fall in job ads (www.scoop.co.nz)
  12. ^ disinflations (www.investopedia.com)
  13. ^ Degrowth isn't the same as a recession – it's an alternative to growing the economy forever (theconversation.com)
  14. ^ increase in the goods and services tax (www.treasury.govt.nz)
  15. ^ monetary (www.rbnz.govt.nz)
  16. ^ fiscal (www.imf.org)
  17. ^ Interest rates: if central banks don't start cutting them soon, it could actually increase inflation (theconversation.com)
  18. ^ more than 15% this year (www.reuters.com)
  19. ^ through policy actions (www.stlouisfed.org)
  20. ^ October 1987 sharemarket crash (www.nzherald.co.nz)

Read more https://theconversation.com/does-fighting-inflation-always-lead-to-recession-what-60-years-of-nz-data-can-tell-us-227894

The Times Features

How to Protect Your Garden Trees from Wind Damage in Australia

In Australia's expansive landscape, garden trees hold noteworthy significance. They not only enhance the aesthetic appeal of our homes but also play an integral role in the local...

Brisbane Homeowners Warned: Non-Compliant Flexible Hoses Pose High Flood Risk

As a homeowner in Brisbane, when you think of the potential for flood damage to your home, you probably think of weather events. But you should know that there may be a tickin...

Argan Oil-Infused Moroccanoil Shampoo: Nourish and Revitalize Your Hair

Are you ready to transform your hair from dull and lifeless to vibrant and full of life? Look no further than the luxurious embrace of Argan Oil-Infused Moroccanoil Shampoo! In a...

Building A Strong Foundation For Any Structure

Building a home or commercial building can be very exciting. The possibilities are endless and the future is interesting. You can always change aspects of the building to meet the ...

The Role of a Family Dentist: Why Every Household Needs One

source A family dentist isn’t like your regular dentist who may specialise in a particular age group and whom you visit only when something goes wrong. A family dentist takes proa...

Benefits of Getting an Online Medical Certificate

Everyone has experienced it. Rather than taking a break, you drag yourself to the doctor's office, where you have to wait in lengthy lines, and then you have to hurry to get that...

Times Magazine

"Eternal Nurture" by Cara Barilla: A Timeless Collection of Wisdom and Healing

Renowned Sydney-born author and educator Cara Barilla has released her latest book, Eternal Nurture, a profound collection of inspirational quotes designed to support mindfulness, emotional healing, and personal growth. With a deep commitment to ...

How AI-Driven SEO Enhancements Can Improve Headless CMS Content Visibility

Whereas SEO (search engine optimization) is critical in the digital landscape for making connections to content, much of it is still done manually keyword research, metatags, final tweaks at publication requiring a human element that takes extensiv...

Crypto Expert John Fenga Reveals How Blockchain is Revolutionising Charity

One of the most persistent challenges in the charity sector is trust. Donors often wonder whether their contributions are being used effectively or if overhead costs consume a significant portion. Traditional fundraising methods can be opaque, with...

Navigating Parenting Arrangements in Australia: A Legal Guide for Parents

Understanding Parenting Arrangements in Australia. Child custody disputes are often one of the most emotionally charged aspects of separation or divorce. Parents naturally want what is best for their children, but the legal process of determining ...

Blocky Adventures: A Minecraft Movie Celebration for Your Wrist

The Minecraft movie is almost here—and it’s time to get excited! With the film set to hit theaters on April 4, 2025, fans have a brand-new reason to celebrate. To honor the upcoming blockbuster, watchfaces.co has released a special Minecraft-inspir...

The Ultimate Guide to Apple Watch Faces & Trending Wallpapers

In today’s digital world, personalization is everything. Your smartwatch isn’t just a timepiece—it’s an extension of your style. Thanks to innovative third-party developers, customizing your Apple Watch has reached new heights with stunning designs...

LayBy Shopping