Did Australia have a recession last year?

No.

A throw away line in an op-ed yesterday by Janet Albrechtsen reminded me that I want to follow up on some economic news from last month.

As The Australian reported last month, the constant claim about Australia’s 28 years of uninterrupted growth stands up only if you ignore GDP per capita. On a per capita basis, Australia has suffered three recessions since 1991, the most recent running from the second quarter of 2018 until the first quarter of 2019. 

This story originates from a blog post from the Federal Reserve of St.Louis.

… Australia has had three recessions since 1991 when looking at GDP per capita, the most recent one being from the second quarter of 2018 to the first quarter of 2019.

Okay – according to the data if you look at the incidence of two consecutive quarters of negative growth Australia has had recessions since 1991.

That, however, is very much a form above substance approach to defining what is a recession. The US uses a combination of economic indicators to determine whether a recession has occurred.  Australia uses two consecutive quarters of negative real seasonally adjusted GDP growth. Not growth per capita – that is not the definition. Whether it should be the definition is an interesting question – but as I show below the answer is “No”.

So looking at the current definition Australia experienced recessions in:

  • 1961
  • 1971/72
  • 1975
  • 1977
  • 1981/82
  • 1991

Okay – lets’s have a look at the  per capita GDP definition (unfortunately a shorter time series of data):

  • 1975
  • 1977
  • 1982/83
  • 1986
  • 1990/91
  • 2000
  • 2006
  • 2018

But now let’s think about what a recession is – a contraction in economic activity.  When economic activity contracts we expect unemployment to rise. So let’s have a look at unemployment. Recall:

A better indicator of recession has been proposed by Saul Eslake – if unemployment rises by 1.5% over a 12 month period then the economy is in recession. 

Okay – let’s look at the numbers.

The blue line is the unemployment rate. The orange line is the 12 month difference line and the gray line is 1.5. When the orange line cuts the gray line from below that signifies that unemployment has increased by 1.5% or more over the past 12 months. By this criterion recessions occurred:

  • 1982/83
  • 1991/92
  • 2009

The per capita measure appears to provide false positives. It is especially difficult to argue that Australia was in recession last year while unemployment was mostly declining and the employment to population ratio rising.  That is not consistent with the notion of economic contraction.

The per capita measure does not tell us if the economy is contracting. It tells us whether population growth is greater than economic growth. Now we can have a debate about levels of population (it will come as a surprise to many of you that I think the more the better) if that is what people really want. But to suggest that population growth causes economic contraction is simply wrong.

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29 Responses to Did Australia have a recession last year?

  1. Michael Ridd

    Sorry, I think you are incorrect on this. To the extent that GDP measures economic welfare then surely that measure of welfare needs to be normalised by the number of people it is spread over?

    I’d argue that the definition of unemployment in Australia is so loose that using unemployment as a measure of resession is at least as questionable as GDP. I’d possibly be more convinced if you used hours of paid work per capita of the population between 18 and 65 as a possible alternative. I’d also add that it seems inconsistent to argue for the use of an unemployment rate to detect a recession but then argue against the use of the corresponding rate of increase in GDP!

    Quite why you would argue that an increasing population is good economically for Australia is a mystery to me. I’d suggest that 50% of Australia’s exports are generated by the million or so people who work in mining or agriculture. Most of the rest of us are just spinning wheels and spending that wealth, so Australia would be far better off with a smaller population.

  2. stackja

    Population growth without roads and dams? Sydney roads can’t handle more people. No Sydney dam since 1960. Leftists don’t want roads or dams. Stop population growth until catch up.

  3. C.L.

    Heh. Interesting. Albrechtsen should have cited the St Louis Fed analysis. That’s being a bit cute. She had a thesis in mind for a critique of where the Liberal government was going and just plonked the claim in there because it suited.

  4. Sinclair Davidson

    CL – to be fair she is relying on the US Federal Reserve analysis. They should know better.

  5. RobK

    Not being very well versed in economics, I’m likely to make an ass of myself, but here goes:
    Whilst I an see you must have a definition, isn’t it a bit of dabbling in semantics if a relatively small change in definition brings a big change in classification. If not a recession then it was pretty close. Then there’s measures of depth of recession, even rate of change, I imagine. Is continually sitting near recession better than having a short, sharp one and moving back to growth. Surely the type of growth makes a big difference too?(how it’s measured and what is it’s substance)?

  6. stackja

    Federal Reserve doesn’t have a good reputation. Milton Friedman wrote they made the 1930s contraction worse.

  7. RobK

    Stackja,
    A fair bit might have changed in 90 years. That’s a long time reputation.

  8. Mother Lode

    As long as GDP is calculated incorporating government expenditure as if it is on par with private sector consumption and private sector investment, and as long as the the definition is two consecutive contractions of GDP, then we can expect governments to mask real contractions with ever more frenzied government spending.

    Just imagine how it would be if they were measured by how well the private sector was going. They might even honestly ask businesses and people how they can help them: a very radical shift in government priorities.

  9. RobK

    ML,
    Id like to measure government efficiency in that GDP as well. A leach factor. What is the nation’s fixed costs and overheads. I have seen them about and in some respects, to my mind, these measures would be a better indication of how we are doing with what we have to work with.

  10. C.L.

    she is relying on the US Federal Reserve analysis.

    I get that but why go to St Louis for a definition?

  11. Sinclair Davidson

    I think Janet was trying to make the point that the government is complacent and shouldn’t be. The St.Louis Fed story was an opportunity to stick a rocket up their butts. BUT the analysis is wrong and misleading but Janet wan’t to know that.

  12. Tel

    Sorry, I think you are incorrect on this. To the extent that GDP measures economic welfare then surely that measure of welfare needs to be normalised by the number of people it is spread over?

    I agree … and more than that, to do it properly you must consider future people as well.

    Suppose the government spends an extra $40 billion this year to boost GDP (because we all know government spending boosts GDP) while also going $40 billion further into debt (impoverishing future Australians) … that’s out for a duck. Zero!

    Same happens if government tightens the belt one year by spending $40 billion less on present day Australians while also paying back $40 billion of the national debt (benefiting future Australians), those two actions cancel out.

    Thus to do the calculation you subtract off the change in GROSS national debt (because nett debt is bullshit at the government level via off balance sheet shenanigans) from that year’s GDP and then divide out over the number of present day people.

  13. herodotus

    The economy parrot is not dead! It’s just resting.

  14. Tim Neilson

    Do people gluing themselves to roads, brawling with police, assaulting other citizens and depriving other people of the right to exercise their normal civil liberties count as economic activity?
    If so, we’re experiencing a boom.

  15. calli

    Something anecdotal. Last year my (old) business had its best year ever.

    This year, starting around June, enquiry rates have fallen off a cliff. Still plenty of contracts to finish but not a great deal coming through. It’s building, so only a tiny sector, but a bit of a canary in the coalmine.

  16. Squirrel

    The GDP per capita measure, and the extent it translates to being able to cover essential living costs and maybe have a little left over, is probably more relevant to popular perceptions of whether things are going well, or not in the economy – regardless of what terminology is used to define that.

  17. Pyrmonter

    @ Tim Neilson

    You raise a good point.

    GDP is, roughly, a measure of total output for a period. It is ‘Gross’ in that it doesn’t deduct depletion of capital stocks. The most obvious capital stock is physical capital: buildings, plant and equipment, transport infrastructure etc. Part of GDP is simply making good the wear and obsolescence of that stock that gives rise to the depletion. If we wanted a measure of ‘income’, we really ought to make that deduction. Similarly, we ought to be making an adjustment for the depletion of natural resources: once you’ve mined something, it can’t be mined again: you’ve reduced your stock of naturally occurring capital. I believe the reason we refer to the ‘gross’ measures is a concern with gaining reliable estimates of capital depletion.

    We really should _stop_ treating GDP as if it was a measure of income: doing so ignores (a) production that occurs outside the market, such as domestic production (the labour input, for example, of gardening or housekeeping, is not reflected in it); and (b) consumption that doesn’t rely on exchange. For example, while GDP captures the cost of my transport and accommodation, it won’t capture the ‘value’ I may create by going on holiday.

    Those are fairly simple issues: ones someone like Janet, writing on public policy, should grasp. On this, I think Sinc has been a bit generous to her. More complex ones emerge when you start thinking about how you might aggregate all those transactions and pieces of capital together to try to calculate ‘NDP’.

  18. Russell

    So let me get this right. We are talking about a holistic conglomerate measure of the economy’s health that has different definitions and measures (depending who you talk to), that we don’t know how to interpret … and don’t know what to do to stimulate or avoid. Seems like it’s a measure that consultants made up and allowed us to rub in politician noses without much logic or practical action that can be taken.
    Does anyone see the parallel with climate emergency thinking where the population and CO2 are being used to simplify really complex systems that seem plausible to the average person when no uncertainty data is presented?
    I do miss Judith Sloan’s contributions on this site.

  19. Arky

    The question isn’t whether or not it was technically a recession, the question is where we are in the cycle.
    That is the question the answer to which will tell you how to behave in the next year or two.
    Why can’t bloody economists answer a simple bloody question with a concise and relevant answer?

  20. Arky

    Well, I will answer the question.
    If we were at the start of a new cycle we would be coming out of recession, a shitload of crap companies would have been liquidated, unemployment would be at a decade high and interest rates low.
    Only one of those is true, so we are at the end of the cycle, but distorted by shit policy.

  21. Arky

    Now I need an economist to tell me what I don’t get.

  22. jupes

    The per capita measure does not tell us if the economy is contracting. It tells us whether population growth is greater than economic growth.

    Surely whether the economy is contracting or not is a moot point if people are worse off on a per capita basis.

  23. Arky

    Has the growth in the government share of the economy resulted in a muting of unemployment rates during recession these last twenty years?
    It seems to me, previously, a recession meant up to or above 10% unemployment.
    But as government reaches toward 40% of the economy, 6 or 7% is the tops.

  24. Pyrmonter

    @ Squirrel

    I used to think so. But then there are other measures that probably matter as well: what your chances are of having a job (so, both the unemployment rate and some measure of labour force participation); how much your well-being has improved beyond the amount that can be accounted for by additional exertion; how wealthy you feel, both absolutely, by comparison to your own history, and by comparison to those around you. I venture there is no ‘ideal’ measure: we really should be looking at a panel of measures, combining market and non-market data (for example, measures of health and longevity); captured across different parts of the country; and having regard to the distribution of income.

  25. Eyrie

    You can see why economics is regarded as one of the voodoo” sciences”.

  26. struth

    But now let’s think about what a recession is – a contraction in economic activity. When economic activity contracts we expect unemployment to rise. So let’s have a look at unemployment. Recall:

    A better indicator of recession has been proposed by Saul Eslake – if unemployment rises by 1.5% over a 12 month period then the economy is in recession.

    Okay – let’s look at the numbers.

    Not if everyone gets chucked into the public service. Why no separation of public versus private employment?
    GDP while including government spending is a socialist measurement.

    Australia is in deep doo doo and is in a long long long recession.

    I travel the place.
    It will give you a better Idea than all this bullshit above, put together.
    Close your books of smoke and mirror figures, and go for a drive, if you can afford it, on our crumbling road system.
    Get out of the over run cities.

  27. Alessio

    The Pub Test to the question is Australia in a recession: Are you better off or at least on a par to where you were financially last year?

    I hear a resounding “NO”!

    No. 1 growth industry is Cost of Living, i.e. government. About time some politician demanded that the government publish a table, to be audited independently, indicating where is lies against other nations in terms of world class practices. First would be what is the contribution to GDP by all levels of government?
    Never happen..

  28. John A

    Michael Ridd #3198495, posted on October 31, 2019, at 3:36 pm

    Sorry, I think you are incorrect on this. To the extent that GDP measures economic welfare then surely that measure of welfare needs to be normalised by the number of people it is spread over?

    I think I am with Struth here:

    GDP while including government spending is a socialist measurement.

    The concept of GDP was not crafted as a measure of individual welfare summed across a nation. It and all the Keynesian measures of macroeconomic theory are based on a collectivist mindset and posit that government should be controlling the levers of the economy.

    Instead, as others have suggested, government expenditure might be deducted from GDP to determine if the private sector is doing better or worse now than before. Basically the government would be encouraged to get out of the b….y way.

    Every time people (like Paul Keating) talk about the government having their hands on “the economic levers” I remember the main characters in Restaurant at the End of the Universe trying to steer the stunt-ship of Hotblack Desiato. Since it was on autopilot, their wrestling with the controls was ineffective and detrimental to its actual path through space, which they only discovered by leaving things alone.

    I can think of only two Treasurers who have understood this point: Peter Costello federally and Alan Stockdale in Victoria (before the institution of the People’s Democratic Republic).

  29. Russell
    #3198626, posted on October 31, 2019 at 7:05 pm

    So let me get this right. We are talking about a holistic conglomerate measure of the economy’s health that has different definitions and measures (depending who you talk to), that we don’t know how to interpret … and don’t know what to do to stimulate or avoid. Seems like it’s a measure that consultants made up and allowed us to rub in politician noses without much logic or practical action that can be taken.
    Does anyone see the parallel with climate emergency thinking where the population and CO2 are being used to simplify really complex systems that seem plausible to the average person when no uncertainty data is presented?
    I do miss Judith Sloan’s contributions on this site.

    Poor Judith didn’t believe the CPI figures were being fudged. Part of my job in the private sector was to rebuild the CPI figures in our own forecast models after the GFC. The RBA/ABS chose to use GFC era spending patterns on post GFC, stimulus era activity to derive a figure. I thought that was highly suspect.

    You have to look at GDP alone as well as per capita because there might be a spurt in births and so on. All the data needs to be understood in context.

    If consumption falls dramatically but in the next quarter you know three large coal mines are starting construction or production and the AUD has fallen in the last three months, do you really worry that much?

    Looking around at vacant commercial real estate isn’t very promising at all.

    As for science, most scientists are literal retards when it comes to actually crunching numbers, unless they have a maths or stats major. Most of them haven’t even heard of cointegration or self-selection bias. Medical science is an utter dumpster fire in that regard. Some engineers don’t even know the difference between manganese and cobalt.

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