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Recession we could not avoid

Australia slipped into recession at some point in the last few months, with the March quarter economic growth data showing the economy contracted by 0.3%. One quarter of negative growth is not a recession, but the June quarter is certain to be negative, meaning Australia – like the rest of the world – is now in the midst of a deep recession.

On an annualised basis, Australia’s economic growth was a fairly sickly 1.4% on a seasonally adjusted basis for the year to the end of March, down from 1.7% a year earlier.

Australia’s growth has been somewhat in the doldrums for some time. Before the onset of the pandemic and its rapid and massive impact, the March quarter was going to be tough anyway, thanks to general economic conditions, the drought and of course, the bushfires. The pandemic pushed the economy over the edge.

We can observe in the chart below that annualised GDP (the red line) was under pressure before the March quarter and we can see the unusual event of a negative quarter also.

 1

Fig. 1

To go straight to the dashboard and take a closer look at the data, click here.

As later items in this edition of Statistics Count will show, we do not need to wait until the end of the June quarter to know that the economy is in recession already.

Writing in The Guardian at the start of June, Greg Jericho put it like this:

“When the underutilisation rate rises 6.8 percentage points in one month, anyone who thinks we need to look further to work out whether or not we are in a recession must ask themselves what they think a recession actually is.”

Jericho is making an important point. Waiting for two consecutive quarters of negative growth to be confirmed is pretty lazy when the ranks of the unemployed and underemployed (the underutilisation rate he identifies) have swelled and the economy is on publicly funded life support.

Indeed, it is the realisation that the economy and the people who rely on it for their livelihoods (all of us) is in dire trouble, that saw the public funds be deployed in what remain jaw dropping quantities and with incredible speed.

One reason for the concern is because the economy is not separate to us. It is of us and we are part of it. For example, household consumption is the actual driver of the modern definition of economic growth. What we spend is the key factor to economic growth. And when we don’t spend, as we have seen, government steps in and acts in our place to support us, and our spending.

We could be forgiven for thinking that household spending would be okay in the March quarter. After all, pandemic fears saw a big spike in purchases of food and household staples in March. But that could not replace the dire situation faced by many households or the understandable spending conservatism of most others.

As we can see below, household consumption growth crashed to zero in the March quarter, down from 0.8% in the December quarter and 1.0% a year earlier. Household consumption was not alone in declining however, other than Alterations & Additions, the other elements of the building sector saw relatively steep falls, with expenditure on New Dwellings tumbling 0.6%, for example.

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Fig. 2

To go straight to the dashboard and take a closer look at the data, click here.

However, when households rein in their expenditure, the role of Government becomes all the more critical in the economy.

Consumption by government added 0.3% to GDP growth in the March quarter – shown in the black line below. It will be significantly higher in the June quarter thanks to the payments under the Job Seeker, Job Keeper, Job Maker and many more general programs deployed to prime the pump.

Another twist in the GDP data is the contribution from net trade. In March both exports and imports fell. In simple terms a decline in exports has a negative impact on GDP while a decline in imports is positive. The contribution from exports was -0.5% and the contribution from imports (which fell further in the period) was +1.7%. The overall impact was a positive contribution from net trade a to GDP.

Business investment continued to perform poorly. Australian businesses, in aggregate, have had their cue in the investment rack for quite some time now. The March quarter saw business investment detract 0.7% from GDP, following on from a 0.6% contraction the prior quarter.

3

To go straight to the dashboard and take a closer look at the data, click here.

Business investment contribution to GDP has been weak for some time with the last 7 quarters since September 2018 either being negative or zero. So how will businesses lead a revival of the Australian economy if they are not investing, for a variety of reasons?

As John Kehoe pointed out in the Australian Financial Review, investment by the non-mining sector fell 1.7% in the March quarter and was down 6.6% over the full year. The miners pulled the griffin from the fire again, more-or-less, ensuring that over the year-ended March, total business investment was still down 2.9%.

Ultimately, what that brings into question is the role of government expenditure in supporting economic growth and the economy in coming months and probably, years. Exactly how and when stimulus can be removed is absolutely anyone’s guess right now.

Only a few months ago the government was expecting to announce a surplus in the May budget. That seems a very long time ago. Now, all of our attention has turned to focus on recession and recovery.

Posted Date: June 9, 2020

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