Recession Similar But Positively Different in Provinces

04/07/2008

Brian Fallow  quotes Split Enz: History never repeats.

There is always some difference that makes a difference. But the similarities can be instructive, too.

A couple of Reserve Bank economists, Michael Reddell and Cath Sleeman, have been looking at six previous recessions in New Zealand – the imbalances which preceded them, what triggered them and what made them worse.

They draw no conclusions about the situation now, beyond saying that “there is nothing in the material in this article to suggest any greater reason for optimism” than the downbeat view expressed in the bank’s June monetary policy statement.

They note the mitigating factors – fiscal stimulus and commodity boom – but say these factors “have much to mitigate”.

By my count 12, maybe 13, of the 17 recessionary factors they list are at work now, two of them – a global credit squeeze and a large rise in oil prices – in spades.

The recession which made the deepest impression on me was that of the mid 1980s. There are several differences between then and now.

Our economy was a mess before then – subsidies, tarrifs and import duties protected producers and manufacturers and increased costs for consumers; just about everything was regulated and/or taxed. Then came the 1984 Lange Government and Roger Douglas’s first budget.

Subsidies ended and farmers were brought kicking and screaming into the real world. The dollar was floated and rose on the back of high interest rates – at one stage we were paying more than 25% on seasonal finance –  inflation raged, commodity prices fell but tarrifs kept the price of inputs up and the labour market was still heavily regulated.

North Otago was particularly hard hit by the ag-sag because too many farms were too small to be economic anyway and there was not much irrigation so we were forever suffering from recurring droughts. At one stage it cost more to transport stock to the freezing works than they were worth. Property prices plummeted and a lot of us were technically bankrupt, owing more than the value of what we owned.

As farmers retrenched those who worked for, serviced or supplied us were hit too and the problems spread to provincial towns. Meanwhile cities were booming on the back rising property prices and the sharemarket. It was only when the market crashed in October 1987 that cities began to feel the country’s pain.

A lot of economic fundamentals have changed since then. A small economy like New Zealand’s will always be at the mercy of international factors, but thanks to those “failed policies of the 80s and 90s” we are in a much stronger position to withstand the worst impact of them.

Another difference is that this time the problems are starting in the cities and, the impact of drought aside, the country is still doing well. Even though sheep farmers have had an appalling season, falling income has been cushioned by rising land prices.

While people are worried about what’s happening elsewhere, the North Otago economy is still growing and property prices are rising. There hasn’t been an empty shop on the main street for a couple of years and a retailer told me he’d paid more GST in the past two months than at any other time since he’d been in business.

People on low fixed incomes, and some earning more, are struggling with steeping rising prices of fuel and food. But the district’s economy as a whole is benefitting from development associated with increased irrigation and the dairy boom.

If we are in a recession right now, as many economists believe, it won’t be official until the June GDP figures are released in September.

And if the statistics mirror anecdotal evidence they will show that this time the recession is starting in the cities and the picture in the provinces is sitll pretty positive.


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