Understanding the New Framework for Assessing New Zealand's Economic Cycles

New research from Motu Economic and Public Policy Research introduces innovative tools to evaluate the true pain of recessions and the vigor of expansions in New Zealand's economy. Titled "On quantitative and graphical measures of the severity of New Zealand's recessions and strength of its expansions," this Motu Working Paper 26-02, published in 2026, offers economists, policymakers, and academics a fresh lens on business cycles. Authored by Emeritus Professor Viv B. Hall from Victoria University of Wellington, Executive Director C. John McDermott from Motu, and statistician Peter Thomson from Statistics Research Associates, the paper builds on decades of quarterly real GDP data spanning from 1954q2 to 2025q3.

Traditionally, recessions are judged by duration—how long they last—and amplitude—the peak-to-trough drop in GDP. But these metrics miss the 'shape' of the cycle: whether the downturn was sharper than a steady decline or the recovery lagged behind expectations. The authors propose three quantitative measures and accompanying graphs that capture 'excess losses' or 'gains' relative to a benchmark of constant quarterly growth, providing a more nuanced picture of economic performance.

The Evolution of New Zealand's Post-War Business Cycles

New Zealand's economy has weathered nine recessions since the late 1960s, alongside eight expansions, using classical turning points identified via Bry-Boschan and BBQ algorithms on quarterly GDP data. These cycles reflect the nation's vulnerability as a small, open economy reliant on exports like dairy, tourism, and manufacturing, often hit by global shocks, commodity prices, and domestic policy shifts.

Key recessions include the deep Covid-19 contraction (2019q4-2020q2, -12.03% amplitude), the Global Financial Crisis (GFC, 2007q4-2009q2, 6 quarters long), and milder ones like the 2024q1-2024q3 dip (-1.87%). Expansions vary widely, from the robust post-GFC boom (42 quarters, +30.40%) to shorter ones like 1988q4-1990q4 (+2.39%). This historical backdrop underscores why refined severity measures are timely, especially as New Zealand emerges from its 2024 per-capita recession amid slow 2026 growth forecasts.

This table highlights select recessions; full details reveal patterns influenced by oil shocks, financial crises, and pandemics.

Decoding the Three Quantitative Measures Step-by-Step

The core innovation lies in three metrics benchmarked against a phase's constant quarterly growth rate, \hat{\mu} = amplitude / duration, plotted as a straight-line trend from peak to trough (recession) or trough to peak (expansion).

1. Total Excess (E*): Sum of log GDP deviations from the trend across the phase. Negative for deeper-than-linear recessions (excess pain); positive for shallower paths. Scales with duration (D) and amplitude (A), bounded by -0.5 D |A| < E* < 0.5 D |A|.
2. Mean Quarterly Excess (\bar{E}^*): E* / D, average per quarter, independent of duration but scales with A. Bounded -0.5 |A| < \bar{E}^* < 0.5 |A|.
3. Standardised Quarterly Excess (\tilde{E}^*): \bar{E}^* / |A| or E* / (D |A|), a dimensionless ratio (0 to ±0.5) comparable across phases, interpreting as mean excess as proportion of amplitude or discounted GDP flows relative to total change.

These extend Harding and Pagan (2016), linking to cumulated losses and offering economic intuition—like covariance of growth surprises with time remaining.

Graphical Tools: Visualizing Cycle Shapes

Complementing numbers, the paper's phase plots standardize paths: cumulative log GDP change vs. quarters or % duration, shading excess areas. Top panels show total E* with phase stats; middle mean excesses; bottom standardised \tilde{E}^*. These reveal outliers, e.g., Covid's path hugging above trend despite plunge, vs. 1990s lagging below.

Smoothing options (constant/linear/local trends) handle GDP noise, decomposing excess into systematic and random components for deeper analysis.

Ranking New Zealand's Recessions: Surprising Insights

From 1987q4 onward, all but one recession showed positive \tilde{E}^* (outperformed linear decline). Covid-19, deepest by amplitude (-12.03%), ranks best by shape (\tilde{E}^*=20.43%), its V-shaped path exceeding expectations. Worst: 1990q4-1991q2 (\tilde{E}^*=-14.16%), underperformed amid early reforms. GFC moderate (\tilde{E}^*=2.17%); 2024 mild but positive (9.36%).

Photo by Sulthan Auliya on Unsplash

• Covid excess cushioned by swift stimulus, border controls.
• 1990s hit by floating dollar, debt crisis.
• Implications: Shape matters more than depth for welfare costs.

Evaluating Expansion Strength: Fewer Standouts

Expansions fare worse: only post-Covid (\tilde{E}^*=30.01%, A=20.46% over 15q) and post-Asian Financial Crisis (1.77%) positive. Post-GFC's long 42q run weak (-4.68%), late 1980s shortest/worst (-11.08%). Plots cluster by growth rate median; post-Covid excels in speed and excess gains.

This asymmetry suggests expansions rarely overdeliver, urging policies for sustained above-trend growth.

Policy Lessons from Refined Cycle Analysis

Reserve Bank of New Zealand (RBNZ) and Treasury can use these for stress tests, beyond simple duration/amplitude. E.g., Covid's mild shape validated aggressive fiscal/monetary response; 2024's positivity amid per-capita recession informs 2026 rate cuts (OCR to 2%?).RBNZ GDP data supports ongoing monitoring.

For academics, links to higher ed jobs in economics at institutions like Victoria University grow as cycle research demands expertise.

2026 Outlook: Applying Measures to Recent Slowdown

Post-2024 recession (ending 2024q3), New Zealand faces stagflation risks—slow growth, sticky inflation—per Infometrics and ASB forecasts. RBNZ holds rates steady Feb 2026, eyeing cuts amid nascent recovery. Paper's tools could rank emerging 2025q4-2026q1 expansion, assessing if it beats linear path amid infrastructure boosts like City Rail Link.

Spotlight on the Researchers Driving This Work

Viv B. Hall, Emeritus Professor at Victoria University of Wellington, pioneered NZ quarterly GDP series. John McDermott, Motu Executive Director (ex-RBNZ Assistant Governor, Yale PhD), bridges policy and research. Peter Thomson provides statistical rigor. Their collaboration exemplifies university-think tank synergy; explore academic CV tips for similar roles.

Future Directions and Broader Implications

Measures extend to incomplete phases, recoveries, international comparisons. With NZ's export sensitivity, integrate trade/financial data. For students, this highlights macroeconomics' relevance—check university jobs in econ/stats.

Download the full paper: Motu WP 26_02 PDF.

Photo by Leroy de Thierry on Unsplash

Key Takeaways for Economists and Policymakers

This paper transforms recession analysis from crude metrics to shape-sensitive tools, revealing Covid's relative mildness and expansions' underperformance. As NZ navigates 2026 recovery, these insights guide stable growth policies. Aspiring researchers, platforms like Rate My Professor and higher ed jobs connect you to mentors and opportunities. For career advice, visit higher ed career advice.