Since the Second World War there have been nine cycles of expansion and contraction in New Zealand. Even excluding the 39-quarter expansion to December 2007, the average duration of each of the eight expansion phases has been more than five years. This is considerably longer than the average contraction phase, which is one year.
New Zealand’s classical business cycles have displayed an unusual level of volatility, especially in contraction phases.
When economic activity wanes, more unemployment benefits are paid, so government spending increases while the tax take falls. The government is pumping more money into the economy than it is taking out, so activity is boosted. As economic expansion takes off, unemployment payments fall, and the tax take rises. In both phases the government softens the rise or fall, but without any explicit policy action – a phenomenon known as automatic stabilisation.
They have also been diverse, with no established pattern in terms of length or cause. However, expansions have typically died not of ‘old age’, but because of an event or series of events. These have included international price and output shocks, unusually dry climatic conditions, financial conditions, and a combination of automatic stabilisers and fiscal policies.
The course of a particular cycle can be influenced by the degree of liberalisation in the economy, and by asset prices (especially housing), monetary policy and the exchange rate.
New Zealand has had two high-growth/low-volatility periods of long expansion and short contraction – from the second quarter of 1954 to the fourth quarter of 1976, and from the second quarter of 1992 until the end of 2007.
It has also had two periods of low growth/high volatility – from the second quarter of 1947 until the first quarter of 1954, and from the first quarter of 1977 until the fourth quarter of 1991.
New Zealand’s real gross domestic product (GDP) growth cycles have been quite volatile compared to those of its major trading partners, such as Australia and the US.
The extent to which New Zealand’s growth cycle has synchronised with those of its major trading partners has varied considerably since the 1980s. While there has generally not been a strong correspondence, New Zealand’s cycles have been most closely associated with those of Australia and the US. The exceptions have been during the economic reforms of the mid-1980s and early 1990s, the 1997–98 Asian financial crisis which coincided with two summer droughts, and the 2001 US recession.