Australia's record recession free run looks set to continue: Bill Evans

EXPERT OBSERVER

A recession is formally defined as two consecutive quarters of negative GDP growth or negative growth in annual terms.

Australia has not had such an event since the early 1990’s. However there is ample evidence that the economy is weak:

1. GDP per capita has contracted over the year.
2. Consumer spending per capita has contracted over the year.
3. Private domestic demand has contracted over the year.

In terms of how the economy might “feel” to households, in particular, these measures certainly point to a downbeat economic climate.

But this is not a recession with the associated extreme pain for households, businesses, and institutions.

So why has Australia not experienced a technical recession since the early 1990’s?

Strong population growth: potential growth is measured as growth in the work force adjusted for productivity growth. Using the global benchmark of 1% for productivity growth, Australia’s potential growth rate is around 2.75% compared to the US of 1.75% and Europe of 1.2%. A high potential growth rate is some protection against a technical recession but, as discussed above, when measured on a per capita basis, Australia has experienced periods of negative growth.

At the times of major external shocks – GFC is the best example – Australia’s fiscal position has been in solid shape to accommodate a strong (“go hard; go households”) policy response which is further complemented by the automatic stabilisers (via lower tax and higher welfare payments). Australia’s budget position went from a surplus of 1.7% of GDP in 2007/08 to a deficit of 4.2% of GDP in 2009/10. Australia’s surplus is currently estimated at around 0.5% of GDP in 2019/20 – lower than in 2007/08 but a surplus no less.

A flexible exchange rate – in the GFC and in the Asian Financial Crisis (1997/98) the AUD adjusted into the USD 0.50’s to offset the impact of the shock.

A flexible labour market also helped during the more recent shocks – employers tended to adjust hours worked rather than staffing levels, cushioning some of the ‘second round’ impacts on household incomes. The more rigid industrial relations systems that prevailed in the 1970s, 1980s and early 1990s made it more difficult to absorb cyclical shocks.

Compensating cycles: most recently, when the mining boom turned down the Australian economy was boosted by the state government infrastructure boom and the residential (mainly high rise) construction boom.

When it appeared that Australia was headed for two consecutive quarters of GDP contraction in 2008 Q4 and 2009 Q1, domestic demand did contract in those quarters (low point of the GFC) but GDP expanded in 2009 Q1 due to the impact on net exports of China’s massive post GFC stimulus package. With the media speculating on a technical recession, the announcement that Australia had avoided a technical recession saw a spectacular (8%) boost in Consumer Sentiment.

Government policy, apart from the fiscal stimulus, also helped Australia avoid a recession in the GFC as banks, whose access to offshore liquidity was under huge pressure, were able to purchase a Commonwealth government guarantee that allowed the rollover of existing short term debt (recall that in that period banks’ wholesale funding was around 60% of total liabilities)

Read the Westpac's full report 'Australia's record recession free run'.

BILL EVANS is Chief Economist for Westpac