I ran this chart in a post the other day
The fall in New Zealand’s per capita real GDP (averaging production and expenditure measures) over the last year has been quite striking set against other advanced (OECD) countries for the same period. We are equal second-worst, and quite a bit worse than the next country with its own monetary policy (Sweden) - I’m mainly interested in the inflation situation. The fall in real per capita GDP in New Zealand thus far isn’t much short of the fall experienced in the 2008/09 recession.
With recent data it is certain there will be revisions and thus it isn’t impossible that the last year might end up looking a bit less bad. But for now, the published data are the best official guesses - for us, and for fiscal and monetary policymakers.
The OECD has data on quarterly real per capita GDP, going back a fair way (a lot further for some countries than for others, but pretty comprehensive for current members from the mid 1990s). I was curious how common falls in real per capita GDP had been in that database.
For the 1980s there isn’t data for many countries, but we find large annual falls in real per capita GDP as follows
- Australia 1982/83
- Canada 1982 (at worst about -5% per annum), and
- the United States 1982 (the recession that saw them get inflation down.
Coming forward to the early 1990s we find
- Finland 1991/92 (some mix of domestic financial crisis and the fall of the Soviet Union)
- Canada 1991
- Iceland 1992
- (New Zealand would probably be on the list but our official population series begins in the middle of the early 90s recession)
Moving on a few years and we have
- Chile 1998/99
- Israel 2001/02
In 2008/09 all but a handful of countries saw a significant fall in real per capita GDP. It was, of course, the recession that ushered in the decade or so of surprisingly low inflation. At worst, per capita real GDP fell by about 5 per cent per annum in the US and 6 per cent in the euro-area (and about 4 per cent here).
In and around 2012 various euro-area countries (but notably Greece) did dreadfully, but the euro-area as a whole only saw real GDP per capita falling at about 1 per cent per annum during that period.
Covid intervened – when we shut down economies for a time and deliberately wound back economic activity – but otherwise there are no big falls in per capita GDP on an annual basis in places with their own monetary policy until……New Zealand right now.
What we have seen over the last year isn’t normal or small, but a large fall, of the sort seen in advanced economies only in pretty adverse times.
Why focus on real per capita GDP? The public commentary tends to focus on GDP itself, with all the attention on whether the total size of the economy is rising or shrinking. But for most economic purposes, and certainly for inflation purposes, it isn’t a very relevant measure. Zero per cent growth in GDP means something a great deal different if the population is static or falling than if it is growing at 2.5 per cent per annum. It is (much) more likely that excess demand pressures are easing if – absent really nasty supply shocks – per capita real GDP is falling, even if there is still some headline growth in GDP itself.
That said, all such comparisons, especially across time, take one only so far. In an era of really strong underlying productivity growth, even a moderate GDP or real per capita GDP growth might be consistent with easing excess demand pressures, and if productivity growth is historically modest – as it has been in much of the advanced world for almost 20 years now – even falling per capita GDP might not be consistent with much or fast easing in capacity pressures.
But a fall of 3.5 per cent in real per capita GDP over the last twelve months probably deserves more attention than it has been getting thus far (even if headline unemployment has still been quite low).
