Reserve Bank governor Glenn Stevens has confirmed what most of us suspected, the economy is in recession.
In a speech in Adelaide on April 21, Mr Stevens conceded that given the international downturn any “reasonable person, looking at all the information available now, would come to the conclusion that the Australian economy, too, is in recession.”
The national accounts for the December quarter showed gross domestic product (GDP) contracted by 0.5 per cent in the final three months of last year, the first fall in economic growth in eight years.
The March quarter GDP figures are due to be released on June 3. If they show another decline, as most economists and market analysts are predicting, Australia’s economy will have met what has become a popular ‘technical’ definition of a recession.
Prime Minister Kevin Rudd has also started using the term ‘recession’.
“The worst global economic recession in 75 years means it’s inevitable that Australia will be dragged into recession,” Mr Rudd said in April.
“The severity of the global recession has made it impossible for Australia to avoid a further period of negative economic growth.”
In a cautiously optimistic speech to the Australian Institute of Company Directors in Adelaide, Glenn Stevens encouraged Australians to accept that the economy will take time to recover and reinforced the message that our long-term prospects are good.
“The first thing is to maintain some confidence in ourselves and the prospects for our country over time,” said Mr Stevens.
He pointed to the advantages Australia has compared to other countries including political stability, an independent banking system, and “very sound” public finances.
“Sensible policy frameworks – both macroeconomic and microeconomic – remain in place; the financial regulatory system is strong and tested,” he said.
“We remain open for trade and investment, and have the capacity to deploy both our own and other people’s capital carefully and profitably.
“Finally, there is an exposure to, and engagement with, an Asian region that still has the most dynamic growth potential in the world, where hundreds of millions of people will for decades to come be seeking rising living standards.”
Mr Stevens concluded that Australia is well placed to ride out the recession.
It is such confidence that, more than anything else, will help to drive us along the road to recovery,” he said.
What does ‘recession’ mean?
GDP is the measure of national income and economic output, or the total dollar value of all goods and services produced here. While the popular definition of a recession is two consecutive quarters of negative growth in gross domestic product (GDP), the reality is more complicated. A better definition of a recession is a sustained period when most sectors or industries in the economy are suffering declines in output. In these times, unemployment tends to rise substantially over an extended period, and, yes, GDP can, and usually does, fall for consecutive quarters.
Admissions from politicians and bankers about the ‘recession’ will not necessarily change anything, except perhaps motivate our leaders to do everything in their power to rebalance the economy.
What caused this recession?
Last year saw a global economic downturn, largely prompted by the slowing of the US economy. Perhaps the root cause of this downturn, is that for too many years, too many people were taking excessive risks with too much borrowed money. While the US housing market was the most visible case where this behavior was excessive, the reality is, that US borrowers and lenders were not alone.
Australia, as a very open exporting nation, is not immune to these shocks. In fact, Australian consumers have also faced high levels of household debt, and downward pressure on house prices.
The last recession
Australia last went into a recession in 1990. The reasons for this are debatable however most economists argue that the financial excesses of the 1980s left the Australian economy bloated and vulnerable to international shocks.
17 of the 18 OECD countries experienced a recession in the early 1990s. This slowing of international markets, combined with Australia’s high interest rates (18%) and levels of debt lead to what the then Prime Minster Paul Keating called ‘the recession we had to have’.
As a consequence of falling asset prices and unpaid loans, a number of Australia’s financial institutions folded, including the State Bank of Victoria, the State Bank of South Australia, and Pyramid Building Society. The damage was not confined to the financial sector, businesses and households cut spending and unemployment rose.
The recession technically lasted a year, from the September quarter of 1990 until the September quarter of 1991. During this time GDP fell by 1.7 per cent, employment by 3.4 per cent and the unemployment rate rose to 10.8 per cent.
This recession followed on from recessions in 1982, 1974 and 1961. Like its predecessors, it was a time of disruption and economic distress. However, there was one major positive outcome from the 1990-91 recession- low inflation.
In the years following, inflation fell to around 2%, bringing Australia in line with the world’s strongest economies. From the mid 1990s Australia enjoyed a sustained period of economic growth with low unemployment, a booming property market and a prospering sharemarket.
What does history tell us?
Past recessions have given us insight into what factors can lead to a recession and what the warning signs are. However, no one can predict the market with absolute certainty or state when the recession will end.
In the meantime, using basic economic principles and learnings from previous recessions, the Australian Government and Reserve Bank are taking active measures to restabilise the economy. Interest rates have been cut, bank deposits guaranteed and Rudd has indicated there will be further cash stimulus measures in the upcoming budget.
As Glenn Stevens emphasises, a recession is painful and but things could be a lot worse.
“Australia’s genuine long-term economic prospects remain good, and there remain good grounds to think that we will continue to weather the storm better than most,” Mr Stevens said.
It’s difficult to remain confident when no one can predict what will happen next but history has taught us one thing – recessions do end and not without positive outcomes and valuable lessons learned.
The global economic crisis (GFC) has wreaked havoc with Australia’s economy. We’ve seen GDP fall, unemployment rise, investments decline and a sombre mood take hold in the market.
While the Australian economy is holding up relatively well in the midst of a global downturn, investors are still bearing the brunt of the worldwide market turmoil.