New Zealand in Recession: What Went Wrong and How to Recover
New Zealand’s economy has officially fallen into recession for the first time since 2010. The country’s GDP fell by 0.1% this quarter, after sliding 0.7% in the previous one. This comes after the country’s central bank raised interest rates to a 14-year-high – and just 4 months before the country goes to polls.
What are the factors that have led to the country’s economy sliding? And what can be done to revive it?
The Causes of the Recession
New Zealand’s recession is largely due to a combination of external and internal shocks that have hit the country’s export-oriented and consumption-driven economy.
Some of the external factors include:
- The global slowdown caused by the COVID-19 pandemic, which has reduced the demand for New Zealand’s exports, especially tourism, dairy, and meat products.
- The trade tensions between China and the US, which have disrupted the global supply chains and affected New Zealand’s access to its major markets.
- The rising oil prices, which have increased the cost of production and transportation for New Zealand’s businesses and consumers.
Some of the internal factors include:
- The drought has affected the agricultural sector, which accounts for about 6% of the GDP and 10% of the employment.
- The housing market bubble, which has made housing unaffordable for many New Zealanders and increased household debt levels.
- The tight monetary policy, which has raised interest rates to 3.5%, makes borrowing more expensive and dampens consumer spending and business investment.
The Consequences of the Recession
The recession has had a negative impact on New Zealand’s economic and social well-being. Some of the consequences are:- The rise in unemployment, which has reached 5.3%, the highest since 2016. This has increased poverty and inequality in the country.
- The fall in consumer confidence, which has dropped to its lowest level since 2008. This has reduced consumer spending and retail sales in the country.
- The decline in business confidence, which has reached its lowest level since 2009. This has reduced business investment and innovation in the country.
- The deterioration in fiscal balance, which has turned from a surplus of 1.5% of GDP in 2019 to a deficit of 4.8% of GDP in 2020. This has increased public debt and limited the government’s ability to stimulate the economy.
The Solutions for the Recovery
New Zealand’s recovery from the recession will depend on how well it can cope with the external and internal challenges that it faces. Some of the solutions are:
- The vaccination program, which aims to vaccinate all eligible New Zealanders by the end of 2021. This will help contain the spread of COVID-19 and allow for a gradual reopening of the economy.
- The trade diversification strategy, which aims to expand New Zealand’s trade relations with other countries and regions, especially in Asia and Europe. This will help reduce New Zealand’s dependence on China and the US and increase its access to new markets and opportunities.
- The green transition plan, which aims to invest in renewable energy, electric vehicles, public transport, and low-carbon industries. This will help reduce New Zealand’s carbon footprint and enhance its competitiveness in the global green economy.
- The housing reform agenda, which aims to increase the supply and affordability of housing in New Zealand. This will help ease the housing crisis and improve the living standards of New Zealanders.
- The fiscal stimulus package, which aims to support households and businesses affected by the recession through tax cuts, cash transfers, wage subsidies, and infrastructure spending. This will help boost consumer spending and business investment and create jobs in the economy.
Conclusion
New Zealand’s recession is a result of a series of shocks that have hit its economy hard. However, it is not all doom and gloom. New Zealand has some strengths that can help it bounce back from the downturn, such as its resilient institutions, its skilled workforce, its natural resources, and its reputation as a safe and attractive destination.
By implementing effective policies that address both short-term and long-term challenges, New Zealand can overcome its recession and achieve sustainable and inclusive growth.