in New Zealands Post -War ar Bu Business iness Cycl cles es Viv - PowerPoint PPT Presentation

23 October 2013 Recessions cessions an and d Reco coveries eries in New Zealand‟s Post -War ar Bu Business iness Cycl cles es Viv Hall Acknowledgements: John McDermott, Brian Easton, Kunhong Kim

SOME MOTIVATING QUESTIONS  Has New Zealand‟s recent recession been its most severe?  Does calling a recession based on two successive quarters of negative real GDP growth provide potentially misleading signals?  Have New Zealand‟s real GDP and employment cycles been closely associated?  What do average and most recent N.Z. & U.S. recoveries look like?  How different has the recovery path from New Zealand‟s recent recession been?

WHAT ARE BUSINESS CYCLES?  “ Bus usiness iness cy cycl cles es are a type of fluctuation found in the aggregat regate e act ctivi ivity ty of nations; … a cycle consists of expa pansion nsions occurring at about the same time in many economic activities, followed by similarly general … co cont ntractions ractions …” (Burns & Mitchell, 1946)

WHAT ARE RECESSIONS?  A rec eces ession sion is a “ … significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in production, employment, real income and other indicators.” U.S. National Bureau of Economic Research (NBER, 2010)  THE NBER R Commit ittee ee that dates business cycles states that most but not all of their identified U.S. . rec ecess ession ions consist of two or more quarters of declining real GDP, and that the committee relies neither on a simple rule of thumb such as two successive quarters of negative growth nor on real GDP alone.

WHAT ARE RECOVERIES?  The re reco cover ery y phase ase of a business cycle is the initial part of a cycle‟s expansion phase, generally measured by the number of quarters taken to get back to the previous peak.

WHAT ARE CLASSICAL AND GROWTH CYCLES?  A Class ssica cal cycle is concerned with movements ments in the levels ls (or log levels) of an aggregate economic series such as real GDP. We have used a Bry and Boschan (BB)(1971) computer algorithm to produce our business cycle turning points.  A growt wth h cycle reflects fl fluctuati tuations ons in aggregate economic activity rel elati ative e to an appr prop opriat riate e tr tren end d in the series. There are a considerable number of ways of ‟de - trending‟ individual series, and hence of getting the corresponding „deviations from trend‟ growth cycles. Our growth cycles reflect utilisation of the well-known and widely-used Hodrick and Prescott (1980) procedure (with λ set at 1600 for quarterly data). The BB algorithm was then used to date our growth cycle turning points.

REAL GDP CLASSICAL & GROWTH CYCLES: 1947q2 – 2012q3 New Zealand Real GDP, log levels, 1947q2 to 2012q3 Classical Business Cycle Contraction Phases/Recessions indicated by shading 10.8 10.4 10.0 9.6 9.2 8.8 8.4 1950 1960 1970 1980 1990 2000 2010 New Zealand real GDP, log levels, 1947q2 to 2012q3 Growth Cycle Contraction Phases/Recessions indicated by shading 10.8 10.4 10.0 9.6 9.2 8.8 8.4 1950 1960 1970 1980 1990 2000 2010 LNGDP HPTREND

ARE GROWTH CYCLES USEFUL?  New Zealand‟s Real GDP movements have been volatile by international standards  Our procedure documents 16 „growth recessions‟  For ma macr cro o policy licy purposes, „growth recession‟ measures create more confusion than clarity  But sample average „key business cycle facts‟ from growth cycles are still valuable for benchmarking academic, central bank and Treasury ma macr cro o mo model els

CLASSICAL CYCLES: 1947q2 – 2012q3 New Zealand Real GDP, log levels, 1947q2 to 2012q3 Classical Business Cycle Contraction Phases/Recessions indicated by shading 10.8 10.4 10.0 9.6 9.2 8.8 8.4 1950 1960 1970 1980 1990 2000 2010

MOST RECENT RECESSION  Commenced March 2008  Ended June 2009  Duration 6 quarters (vs. average 4.3)  Depth -3.90% (vs. average -3.95%)  Severity (-11.5%) less than the recessions of 1951/52, 1948, and 1977/78 (-37.2%, -15.6% and -12.8%) (vs. average -10.4% of GDP) Harding & Pagan (2002) cumulative loss measure

IS A RECESSION 2 NEGATIVE QUARTERS?  Commonly-used practice  Matches 6 of the 9 classical cycle recessions identified by the Bry-Boschan method  Called 3 additional recessions: 1975q3-q4; 1989q3-1990q2; 2010q3 0q3-q4 q4  Also called differently by 2 quarters the timing of a beginning or end point for 3 of the 9 recessions

CLASSICAL GDP & EMPLOYMENT CYCLES: 1956q1 – 2012q3 New Zealand Real GDP, log levels, 1956q1 to 2012q3 Classical Business Cycle Contraction Phases/Recessions indicated by shading 10.4 10.0 9.6 9.2 8.8 1960 1970 1980 1990 2000 2010 New Zealand Total Employment, log levels, 1956q1 to 2012q3 Classical Employment Contraction Phases/Recessions indicated by shading 7.8 7.6 7.4 7.2 7.0 6.8 6.6 1960 1970 1980 1990 2000 2010

EMPLOYMENT CYCLES – ON AVERAGE  Number of peak-to-peak employment cycles and cycle phases: same as for the real GDP series, until end-2011. But, a recent extra employment expansion phase.  Average durations are similar, but employment cycle and phase volatilities greater  Employment and real GDP expansion and contraction phases “concordant” 89% of the time

CONCORDANCE STATISTICS, 1956q1-2012q3 Concordance GMM t-test Employment lags real GDP turning point 1 quarter .89 4.65*** 2 quarters .87 3.88*** 3 quarters .83 2.16** Contemporaneous .87 4.13*** Employment leads real GDP turning point 1 quarter .84 2.58*** 2 quarters .80 0.79

EMPLOYMENT CYCLES – SPECIFIC CYCLES MATTER  Employment troughs lag output troughs for six of our seven cycle troughs  But not every individual employment peak has lagged its real GDP peak by 1 quarter, e.g. 2012q1 is one of 3 employment peaks which have led a GDP peak

RECOVERIES TO PREVIOUS PEAKS  Average duration 6.6 qtrs (range 2-13 qtrs)  Current recovery to previous peak 2 nd slowest (9 qtrs); but 8 qtrs from 1988q4, 7 qtrs from 1991q2  Range of annualised rates of recovery: 1.2% (from 1988q4) to 10.8% (from 1948q4)  Some other annualised rates of recovery: 7.0% (from 1983q1), 2.0% (from 1991q2), 2.3% (from 1998q1) 2.0% (from 2009q2)

AVERAGE RECOVERY PATHS: N.Z. & THE U.S. 7 New Zealand: all classical cycles, 1947q2 - 2012q3 6 Contractions 5 Expansions Annualised % growth rates 4 3 2 1 0 -1 3 4 5 6 7 8 1-2 3-4 5-6 7-8 -2 Year Quarters -3 -4 7 U.S.: NBER cycles, 1947q2 - 2012q3 6 Annualised % growth Contractions Expansions 5 4 3 rates 2 1 0 -1 1-2 3-4 5-6 7-8 3 4 5 6 7 8 -2 Quarters Year -3 -4

MOST RECENT RECOVERY PATHS: N.Z. & THE U.S. AN ATYPICAL U.S. RECOVERY? Recover ery y paths s from om most t recen cent t peak, U.S. . & & N.Z., Z., Peak k 2007q 7q4 4 = 100 103.00 102 02.00 101.00 100.00 99.00 .00 98.00 .00 97.00 .00 U.S. .S. 96.00 .00 New Z ew Zeala ealand nd 95.00 .00 94.00 .00

COMPONENTS OF GDP: NEW ZEALAND Cumulated movements, real GDP expenditure, two expansion phases 3000 2500 2000 2007q4 to 2012q3 1990q4 to 1995q3 1500 1000 500 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 -500 -1000 -1500 -2000 -2500

COMPONENTS OF GDP Cumulated expansion phase movements, two major contributors 3,000 Private Invest & Durs from 2007q4 NX from 2007q4 2,000 Private Invest & Durs from 1990q4 NX from 1990q4 1,000 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 -1,000 -2,000 -3,000

WHICH COMPONENTS SUSTAIN RECOVERIES? Cumulated movements: 1990q4 to 1997q2 4500 GDP Expend 3500 Cons NDurs Inventories 2500 Private Invest & Durs 1500 Net exports 500 1 3 5 7 9 11 13 15 17 19 21 23 25 27 -500 -1500

WHICH COMPONENTS SUSTAIN RECOVERIES? Cumulated movements: 2007q4 to 2012q3 3000 2000 GDP Expend Cons NDurs 1000 Inventories 0 1 3 5 7 9 11 13 15 17 19 Private Invest & -1000 Durs Net exports -2000 -3000

SUSTAINERS AND NON-SUSTAINERS? Cumulated movements: 1990q4 to 1997q2 2500 Invest All Sectors & Durables 2000 Gen Govt Invest 1500 Cons Dur Invest Res 1000 Invest Nonres 500 Invest other 0 1 3 5 7 9 11 13 15 17 19 21 23 25 27 -500 -1000

SUSTAINERS AND NON-SUSTAINERS? Cumulated movements: 2007q4 to 2012q3 3,000 Invest All Sectors & Durables 2,000 Gen Govt Invest 1,000 Cons Dur 0 1 3 5 7 9 11 13 15 17 19 Invest Res -1,000 Invest Nonres -2,000 Invest Other -3,000

SOME SUMMARY BROAD TAKEOUTS  Calling technical recessions can on occasions signal beginning & end points for recessions that are somewhat different from those computed by our BB method  Classical cycles much more informative than growth cycles, for decision making & most policy analysis  Real GDP & employment cycles have been remarkably similar on average, but interpreting particular contraction phase leads or lags needs additional care

SOME SUMMARY BROAD TAKEOUTS  Severity of previous recession may matter for subsequent recovery paths  Valuable insights from assessing post-June 1991 and post-June 2009 recovery paths