‘It is a tricky business’: How will we know if we’re in recession?
By Rachel Clun
Two years of unsustainable spending, high levels of consumption and a struggle with high inflation – these issues were all front of mind for then-treasurer Paul Keating when he announced on November 29, 1990, that Australia had entered a recession.
This was, he said, “a recession that Australia had to have”.
Treasurer Paul Keating talking about the recession we ‘had to have’ in 1990.Credit: Peter Morris
Economists are increasingly worried Australia will enter a recession in the near future. But millions of Australians were not even alive at the time of the 1990s recession.
In fact, until the first half of 2020, when the COVID shutdown drove economic growth into the negative for two consecutive quarters – the most common definition of a recession – Australia had gone recession-free for 30 years.
“No other country has achieved that. Even during the global financial crisis, we didn’t have a recession,” says Selwyn Cornish, an honorary associate professor at ANU.
Recessions are easy to see in hindsight, but are more difficult to spot on the way down.
“It is a tricky business. If it was really straightforward, we wouldn’t have as many recessions as we have had over the years,” Cornish says.
The big indicator: jobs
Picking when the economy has slid into recession is difficult because no two downturns are alike.
The US National Bureau of Economic Research defines a recession broadly, as “a significant decline in economic activity that is spread across the economy and that lasts more than a few months”.
Those declines can be caused by different problems. The global financial crisis was started by a downturn in the US housing market, sparking a crisis that spread around the world and led to millions of job losses.
They can also be triggered by environmental or health crises, such as the technical recession at the start of the pandemic when Australia shut its borders and businesses were forced to close to in-person customers, driving the unemployment rate up to 7.5 per cent and the economy to shrink 6.7 per cent in the middle of 2020.
As a result, there are different ways of deciding whether a recession has occurred, but none of them are perfect. A technical recession is two consecutive quarters of negative economic growth and, last week, New Zealand met the technical definition of a recession.
That definition is limited because it doesn’t count periods of weak but positive economic growth where there are other recessionary pressures, such as a high unemployment rate – and New Zealand met it, with an unemployment rate near record low levels.
Another measure is a per capita recession, which is two quarters of negative growth in gross domestic product per person.
A different measure, proposed by US economist Claudia Sahm, suggests a recession is occurring if the quarterly unemployment rate lifts by half a percentage point (or 0.75 percentage points in a modified version used recently by the Reserve Bank) above the lowest jobless rate experienced in the preceding 12 months.
There are different ways of deciding whether a recession has occurred, but none of them are perfect.Credit: Illustration by Richard Giliberto
Former Reserve Bank governor Bernie Fraser, who headed the institution during the 1990-91 recession, says while all recessions are different, job losses are the factor that is most felt across the country.
“The essence of a recession is unemployment – increasing unemployment,” he says.
When Keating confirmed Australia had entered a recession in 1990, he did not know the long-lasting damage it would cause.
Before the recession, in early 1990, the unemployment rate was a little over 6 per cent. It didn’t return to that level for a decade, after peaking at 11.2 per cent at the end of 1992.
Peter Duffy was working for the predecessor of Energex in Ipswich, west of Brisbane, when the recession hit. He watched colleagues and friends lose their jobs, and ended up in a workplace no-man’s land for about six months when his role was axed, floating between roles until the company found him something permanent.
“It was a really tough work time because you really didn’t know what was going to happen tomorrow when the sun got up, you know, what sort of disaster was going to greet you,” he says.
The lifetime Services Union member said it took a considerable time for many of his former colleagues and friends to get back on their feet. Duffy said the experience changed the way he thought about work and money.
“It made you always cautious when there was a surplus, or money was flowing freely, to keep something in reserve – you knew something was going to come around the corner,” he says. “It probably hardened me a fair bit.”
Fraser says we can’t compare today’s economic situation to that of the 1990s. Early in 1990 interest rates were 17.5 per cent, unemployment was 6.5 per cent and inflation was near 9 per cent.
“The Reserve Bank was trying to reduce interest rates from those very high levels, at a speed that would keep the pressure on inflation, but at the same time would reduce the risk of a serious recession and unemployment,” he says.
Today, the situation is the other way around: the Reserve Bank is lifting interest rates to help rein in inflation. But Fraser says the challenge is the same: to change interest rates in a way that will wind back inflation, without adding recessionary pressures.
“It’s a difficult balancing act,” he says.
Who holds the reins
It’s an act the RBA ultimately didn’t pull off in the 1990s. But until the pandemic, Australia was able to avoid some major economic speed bumps, including the worst of the GFC.
Margaret McKenzie, a senior economist for think tank Per Capita, says the difference between the 1990s and the GFC is that the government stepped in to try to avoid a recession, and did so in a major way.
To avoid an economic crash, in 2008 and 2009 the Rudd Labor government announced economic stimulus worth more than $52 billion, which included pre-Christmas cash payments to millions of Australians and a large infrastructure program.
“That massive package of government expenditure, that actually saved us during the GFC,” McKenzie says. “And that was fairly clear because Australia managed better out of that than a lot of other countries did, and that was because we had a bigger fiscal stimulus at the time.”
Similar government intervention at the start of the pandemic also helped limit the impact of the nationwide shutdown.
McKenzie says it’s too much to expect the Reserve Bank to manage a soft economic landing alone this time around.
“It’s going to be fiscal policy that really determines, as it did during the COVID period, how well we handle it, whatever recession is coming,” she says.
Fraser says supply pressures – which have accounted for more than half of Australia’s inflation, according to new RBA research – have also complicated the RBA’s task.
“It just adds to the uniqueness of the present situation,” he says. “The bank can’t do anything to really counteract the prices that are pushed up by supply problems from overseas, and most notably the invasion of Ukraine.”
Former Reserve Bank governor Bernie Fraser compares trying to tame inflation to training a horse.Credit: Fairfax Media
Fraser, who owns and trains horses, says the RBA’s current job is similar to successfully breaking in a colt or filly.
“You apply a bit of pressure, and then you pause. You pull the rein, but then you relax it. You don’t pull the rope all the time because that’ll drive the horse mad,” he says.
“In a sense it’s the same sort of thing … you have to have pauses in between [rate rises] so you can let the earlier interest rate measures work their way through.”
Fraser says keeping the pressure up without any pauses will make everything go awry, particularly when part of the problem, such as external supply constraints, is not being fully addressed.
“It’s like my pulling the horse and someone outside the yard is stabbing it in the backside with a stick. Maintaining the pressure is not going to make any difference to the response,” he says.
In search of the tipping point
Is Australia headed for a recession in the near future? The RBA’s June interest rate rise has more economists worried the economy is headed for a hard landing.
Current governor Philip Lowe, after raising the cash rate to 4.1 per cent earlier this month, said even higher rates may be necessary to bring inflation to heel.
ANU’s Selwyn Cornish says the trouble is it’s difficult to know for certain a recession is coming.
“It’s a tricky business identifying [a recession] and doing it ahead of time, not after the event.”
Reserve Bank and Treasury experts attempt to predict it through forecasting and looking at so-called forward indicators – signs the economy is beginning to tank.
“There are some indicators that they know from past experience tend to predict a recession better than and earlier than other indicators,” Cornish says.
The modified Sahm rule is one of those indicators, and the RBA used it earlier this year to try to forecast the chance of a recession in the next 18 months.
JP Morgan has also been looking for signs a recession is coming by looking at the interest rates on government debt. In ordinary economic times, the interest on a 10-year government bond is higher than on a bond that will be repaid within three years.
But interest rates on 10-year bonds this month fell below those on short-term debt. It’s a sign that financial markets are concerned about future economic conditions, and a portent that a recession could be around the corner.
Cornish says RBA and Treasury officials also gather data from around the world, and take in experiences from businesses and state governments to keep on top of how the economy is moving.
Monitoring all those signals, Bernie Fraser says those experts then weigh that information up to help make their decisions.
“It’s an art, not a science,” he says. “You make judgments about all these things and try to find that narrow path through it that brings inflation down without causing a recession.”
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