Some Perspectives on Past Recessions
Reddell, Michael, Sleeman, Cath, The Reserve Bank of New Zealand Bulletin
As the economy slows in 2008, this article sketches out some key features of past recessions in New Zealand--all the downturns since the mid-1960s, plus the Depression of the 1930s. Each recession was triggered, in significant part, by international events, but each was exacerbated, in part, by domestic pressures or imbalances. History doesn't mechanically repeat itself, but these past experiences are a sobering backdrop against which to consider the outlook for the New Zealand economy over the next year or two.
1 Introduction (1)
A recession is a material period over which the level of economic activity is falling. Understanding the events that have triggered past recessions, and exacerbated or mitigated their severity, may help to shed some light on the current situation.
We selected six previous recessionary periods in New Zealand, beginning with the Depression in the early 1930s. Our decision to examine the Depression was motivated by recent comments that the current stresses on international financial markets are as severe as those in the 1930s. Our main focus, however, is on the five main recessionary periods in New Zealand since the mid-1960s. As time has gone on, the structure of the economy and the policy framework have become progressively more similar to that today.
For each recession, we sketch out the important factors and events leading up to the recession, the likely causes of the recession, the impact of the recession on the economy, and finally the responses of fiscal and monetary policy. More indepth formal treatments could be usefully undertaken of each of these episodes. Here, we take a more impressionistic approach-briefly highlighting key considerations, and looking for common themes and patterns across the various episodes.
2 The Depression (1930-1934)
The starting point
At this time, New Zealand's exports were highly concentrated. In 1929, around 84 percent of exports were pastoral and Britain took around 80 percent of the total. The Depression was, however, an international event and a more diversified export sector may not have significantly lessened the impact on New Zealand.
New Zealand had few of the initial imbalances that often exacerbate downturns. There had been no major credit, share price, or house price boom in New Zealand in the mid-late 1920s, no particular inflation problem, and fiscal policy was no more than mildly stimulatory. However, many New Zealand farmers entered the Great Depression with large debts, a legacy of a boom in the early 1920s following the end of World War One.
New Zealand had no central bank, and hence no independent monetary policy, until 1934. The exchange rate for the New Zealand pound had been informally fixed to sterling, but this relationship was managed by the commercial banks rather than by any government agency. Maintaining a fixed exchange rate was seen, internationally, as an important indicator of financial soundness and of a commitment to prudent economic management.
The causes of the global Depression are still debated. The stock market crash in the US beginning in October 1929, to which the Federal Reserve responded with sharp reductions in US interest rates, was certainly not the cause. However, the resulting losses and interruptions to the availability of credit were among the many factors that exacerbated the downturn.
Exchange rates and capital flows mattered a lot. For much of the 1920s, countries had focused on trying to re-establish the Gold Standard (under which a currency was convertible to gold at a fixed and pre-announced price). At the same time, much of Europe's growth in living standards was heavily reliant on short-term capital inflows from the US to finance post-war reparation payments and to service large war debts. This flow of capital was curtailed in the late 1920s when the US experienced a speculative boom (on some measures, US leverage reached levels not seen again until this decade). …