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