Read The Times Australia

Daily Bulletin

Data indicates the recession is effectively here; it's what policy makers do next that counts

  • Written by: Daily Bulletin
imagePerhaps this is not technically a recession, but certainly it looks, smells, and feels a lot like one. AAP/ Sam Mooy

The latest economic figures released by the Australian Bureau of Statistics (ABS) have fuelled the debate on the future of the Australian economy and prompted many to ask: “Will Australia go into a recession?”

This question is legitimate, but off the mark. In fact, the data tells us that we should not be worried about going into recession.

What we should worry about instead is how to get out of the recession. Because, like it or not, the recession is already here and the sooner we acknowledge the problem, the sooner we can start the recovery.

So, what does the data say?

According to ABS, trend Gross Domestic Product (GDP) growth in Australia in the second quarter of 2015 was 0.5%. This was only marginally below the rate observed in the first quarter of the year (0.6%). The implied annual growth rate of GDP is therefore around 2%.

While considerably below the long-term average of 3.25% a year, trend growth is still positive, which means that Australia is not technically in a recession.

Economists technically define a recession as a period of at least two consecutive quarters of negative GDP growth. This occurs rarely in an advanced economy like Australia.

The last time Australia was technically in recession was 24 years ago, when trend growth turned negative in the third quarter of 1990 and did not go back to positive until quarter four of 1991.

Before then, trend growth was negative for five quarters between 1982 and 1983, for two quarters in the middle of 1974, and for four quarters between 1960 and 1961.

However, while not being technically in a recession, Australia today shows most of the symptoms of recession.

Reload: what does the data say?

First of all, trend GDP is by construction smoothed. However, recessions (and expansions) are cyclical phenomena that are better represented by seasonally adjusted GDP.

In the second quarter of 2015, seasonally adjusted GDP in Australia grew by a mere 0.2%, sharply down from the first quarter when it grew by 0.9%. That is, seasonally adjusted data suggests that the country is much closer to the beginning of a technical recession.

Second, seasonally adjusted Gross Domestic Income (GDI) showed negative growth of -0.4%. This is particularly worrying because GDI is statistically more reliable than GDP as a predictor of the cyclical fluctuations of the economy.

Third, and probably even more importantly, indicators of an individual’s welfare are taking a turn for the worse. The second quarter of the year saw a negative growth in GDP per capita (-0.2%) and net national disposable income per capita (-1.2%).

These negative income dynamics add to persistently weak labour market performance.

The ABS labour force survey shows that in July 2015, seasonally adjusted unemployment reached 795,500 units. This is the highest level since November 1994 and approximately 125,000 units higher than at the peak of the global financial crisis (June 2009). The corresponding unemployment rate was 6.3%.

In the same month of July 2015, youth unemployment increased to 13.8%. This was the first monthly increase since the beginning of the year.

Perhaps this is not technically a recession, but certainly it looks, smells, and feels a lot like one.

Intervention needed

The government, however, seems to be in denial.

Finance Minister Mathias Cormann is reportedly “very optimistic about the outlook moving forward”. Treasurer Joe Hockey recently said that “the Australian economy is showing a deep resilience that people in Canada and elsewhere would die for.”

Unfortunately, the fact that Canada is in a technical recession and other resource intensive countries are suffering from falls in commodity prices does not make the situation of Australia any better.

Conversely, the business sector seems to have understood the reality of the situation. This is evident, for instance, in the declining levels of business confidence and conditions reported by the NAB Monthly Business Survey of July 2015.

The good thing about recessions is that, generally, they end. The bad thing, instead, is that their effects are felt proportionally more by households at the bottom end of income distribution.

Another bad thing is that the consequences of a recession (in terms of unemployment, reduced welfare for instance) tend to outlive the recession itself.

For all these reasons, some form of intervention would be desirable; but how?

In Australia’s case, the empirical evidence clearly indicates that fiscal stimulus works: for each dollar spent by the government, GDP increases by more than one dollar.

In fact, already now, what has prevented the country from recording negative GDP growth is good old Keynesian spending.

Government final consumption grew by 2.2% in the second quarter of the year and 4% since the beginning of the year. Public gross fixed capital formation increased by 4% in the second quarter.

Without this extra public spending Australia would have probably experienced its first quarter of negative growth.

Certainly, Australia also has structural problems that condition its longer-term performance and that a fiscal stimulus will not solve.

But the stimulus will improve the short-term outlook, restore confidence, and create favourable socioeconomic conditions to undertake structural reforms.

To get there, however, an initial step is required: the government must get past its denial of the problem. Let’s hope that this happens sooner rather than later.

Fabrizio Carmignani receives funding from the Australian Research Council for a project on the estimation of the piecewise linear continuous model and its applications in macroeconomics.

Authors: Daily Bulletin

Read more http://theconversation.com/data-indicates-the-recession-is-effectively-here-its-what-policy-makers-do-next-that-counts-47255

Business News

How Businesses Can Prepare for Unexpected Power Outages

Power failures can occur quickly. The supply may be interrupted by bad weather, issues with the electricity network, damaged equipment or local construction work. This can be just a hassle for a fam...

Daily Bulletin - avatar Daily Bulletin

How Chatswood Tutoring Can Fit Into a Student’s Weekly Routine

Create a Predictable Weekly Structure A consistent weekly routine can make study easier to manage when students are balancing several subjects. Chatswood tutoring can provide a fixed learning point a...

Daily Bulletin - avatar Daily Bulletin

The Rise of Digital Marketplaces in the Australian Trade Sector

For decades, the Australian trade and construction sector operated almost entirely on word-of-mouth recommendations and local community networks. Small business owners typically relied on local newspa...

Daily Bulletin - avatar Daily Bulletin

How Immigration Lawyers Can Help

Introduction Visa decisions can shape employment, family life, study plans, travel, and future residence. A small omission can lead to delay, added expense, or refusal. Immigration lawyers assess l...

Daily Bulletin - avatar Daily Bulletin

How Industrial Drying Equipment Supports Efficient Processing

Many industrial processes require moisture to be removed from compressed air, products or process materials before they move to the next stage. Excess moisture can affect equipment performance, produc...

Daily Bulletin - avatar Daily Bulletin

Practical Ways a Whiteboard Can Improve Workplace Communication

Effective communication helps teams stay organised, share ideas and keep track of important information. While digital tools are now common in many workplaces, a whiteboard continues to provide a simp...

Daily Bulletin - avatar Daily Bulletin

Designing Eco-Friendly Custom Water Bottles for Your Next Event

The Evolution of Sustainable Event Merchandise Event planning has undergone a massive transformation over the last decade. Gone are the days when organizers could hand out cheap, single use plastic...

Daily Bulletin - avatar Daily Bulletin

Why Choosing a Professional Florist Melbourne Makes Flower Delivery Impactful

Flowers have a great power to speak when humans cannot express their feelings with right words. Flowers are the best gifts when you are celebrating a birthday or welcoming a newborn child into your fa...

Daily Bulletin - avatar Daily Bulletin

The Business Case for Choosing Australian Fabricators Over Imported Alternatives

For a long time, you might have defaulted to overseas suppliers when sourcing fabricated metal components for a project. The unit price was lower on paper, and the maths seemed straightforward. That...

Daily Bulletin - avatar Daily Bulletin

The Daily Magazine

Sydney Academy Partnership Targets Talent Development for Travel and Hospitality

VFS Global Academy’s Australian expansion will focus on practical skills and career development thro...

How Strategic Corporate Gifting Boosts Client Retention and Team Morale

As the calendar pushes towards the end of the year, business leaders across Australia begin evalua...

The Importance of Reliable Plumbing Services During Home Renovations

A freshly renovated bathroom can make an ordinary Monday morning feel a little more inviting. The ne...

Backyard Living Options for Campbelltown Homes: What Works Best?

You know that feeling at the end of a long, busy week when all you want is a calm spot outdoors, whe...

Smart Wardrobe Storage Ideas for Small Sydney Apartments and Bedrooms

A well-designed wardrobe is one of the most useful things a home can have. It's meant to keep clothe...

Colorbond Fencing in Australia: Costs, Colours, Rules and What Actually Lasts

Drive through almost any Australian suburb built in the last thirty years and you are looking at the...

Why Your Dental Clinic Is Not Getting Enough New Patient Bookings From Google

Introduction SEO for Dentist is not just about getting a dental clinic to appear somewhere on Goo...

Low Water Pressure in Sunbury: Is the Problem Inside Your Home or Outside It?

Low water pressure is one of those problems that can send a homeowner in the wrong direction. A we...

4 Beige Rugs for Beautiful and Comfortable Wooden Flooring

Wooden flooring already brings warmth and character to a room, but a beige rug can make that found...