We’re in a recession. What now?

It is important to establish that gross domestic product ‘GDP’ data is always released with a lag. We get these reports from Stats NZ on a quarterly basis, for the previous quarter. It is already three months old when we see it.

There has been a 0.8% dip in GDP over two consecutive quarters. This was a 0.7% dip in the December 2022 quarter, and a more modest 0.1% dip in the March 2023 quarter.[i]

It’s not the worst recession we’ve had in recent times. That dubious honour would belong to the 11.2% contraction between the January 2020 and June 2020 quarters[ii]. Retailers were shut, with even online retailers being limited to ‘essential supplies’ for a time. Borders were closed. Most of us were at home trying to figure out Zoom meetings or baking sourdough.  To shutter a nation, a substantial decline in GDP was only to be expected.  If 2023’s recession is a smouldering fire, the 2020’s recession was harder to pinpoint because the whole house was burning.

While that 0.1% contraction to March may seem small by comparison to other events – indeed, some are touting it as a “toe-deep recession”[iii] – the factors feeding it are not. The flames of this recession have been fanned by rampant inflation and high interest rates. New Zealand has seen higher prices at the supermarket (and the petrol pump, vegetables, eggs… and in loan repayments… and the list goes on). We will continue seeing this, and other impacts in areas like the workforce. The labour shortage has kept things tight for a while, but as businesses look to reduce costs instead of expanding in unfavourable conditions, we are likely to see some layoffs as a result of what is predicted to be a long, shallow recession.[iv]

Many have argued over the prior four recessions from 1991 to the present that it is better to have a short, sharp recession (V shaped) than a long prolonged one (U shaped).  A prolonged recession that was suffered by our forbearers in the late 1920s and ‘30s saw behaviour patterns permanently change.  The old analogy of hunkering down and getting through to the other side didn’t pan out as the other side couldn’t be seen.  People simply had to capitulate as their mental and physical reserves were exhausted.

The NZ stock market, NZX50 has produced a total return of 4.1% from 1st December 2019 to now. That’s not annualised, that’s the total – that’s pre-covid times. Meanwhile, the US, S&P 500 is up 54.6% in the same period and Australia, ASX300 is up 26.4% (both expressed in NZ dollars).  Rather cheekily, some think-pieces from over the ditch are using us as a cautionary tale of possible woe and misery to come.

This wee snapshot of markets shows the importance of diversifying across countries and industries when investing. We can see it plainly here – they aren't highly correlated of late.  There’s little rhyme or reason in predicting the direction of market volatility and returns, but we know from research and historical evidence that these storms do happen. The best way to avoid your money sinking with one ship is to spread it across the fleet and send them in different directions.

During a recession, it’s time to return to basics. Look at your budget and where you can tighten the belt. If you are in the position to do so, and if you have not done so already, start putting money aside for an emergency fund. Aim to have enough in reserve to cover 3-6 months of living expenses. Having a financial cushion in hard times is of great comfort. It can also mean that you are less tempted to pull from your investment funds, which will hinder your investment’s long-term growth.

If you find yourself slipping behind in payments for the mortgage or other bills, there are services out there to help you. Sorted.org and MoneyTalks are great free options for this. And if it is the mortgage, try talking to your bank directly – and try to do this as soon as possible once you’re aware of the issue.

Expert financial planning, being realistic about how much risk we are taking, and being careful to not take on more risk than we can reasonably bear (or more risk than is necessary to meet our needs and goals in life) are good focal points in normal times. They’re even more valuable in hard times, where our emotions may cause us to make snap decisions which will be detrimental down the line.

The best approach is often to have a plan to make the most out of the situation. This is where a trusted fiduciary can come into play by creating a financial roadmap based on evidence and offering unbiased advice to keep you on the right path.

·         Nick Stewart (Ngāi Tahu, Ngāti Huirapa, Ngāti Māmoe, Ngāti Waitaha) is a Financial Adviser and CEO at Stewart Group, a Hawke's Bay-based CEFEX & BCorp certified financial planning and advisory firm. Stewart Group provides personal fiduciary services, Wealth Management, Risk Insurance & KiwiSaver scheme solutions. Article no. 311.

·         The information provided, or any opinions expressed in this article, are of a general nature only and should not be construed or relied on as a recommendation to invest in a financial product or class of financial products. You should seek financial advice specific to your circumstances from an Authorised Financial Adviser before making any financial decisions. A disclosure statement can be obtained free of charge by calling 0800 878 961 or visit our website, www.stewartgroup.co.nz

[i] https://www.stats.govt.nz/news/economic-activity-falls-0-1-percent-in-the-march-2023-quarter/

[ii] https://www.kiwiblog.co.nz/2023/06/were_in_recession.html

[iii] https://businessdesk.co.nz/article/economy/toe-deep-recession-offers-something-for-everyone

[iv] https://www.rnz.co.nz/news/political/492045/recession-a-red-light-warning-for-incredibly-fragile-economy-national

https://en.wikipedia.org/wiki/Great_Depression

Investment growth data is cumulative total return for S&P 500, S&P/ASX 300 and S&P/NZX 50 between December 1st, 2019 and June 22nd, 2023 and is based on the monthly return series, converted to NZD. Data source – Morning Star Direct