With the publication this week of the latest \u201cnational accounts\u201d, our situation is now clear: we\u2019re not in recession, yet we are \u2013 but, in a sense, not really.<\/p>\n
Confused? It\u2019s simple when you know. One thing we do know is that the economy \u2013 as measured by real gross domestic product \u2013 will have contracted significantly in the present quarter, covering the three months to the end of September.<\/p>\n
At this stage, the smart money is predicting a contraction \u2013 a fall in the production and purchase of goods and services \u2013 of \u201ctwo-point-something\u201d per cent, although there are business economists who think the fall could be as much as 4 per cent.<\/p>\n
<\/p>\n
Empty shops in Melbourne’s inner-city.<\/span>Credit:<\/span>Justin McManus<\/cite><\/p>\n Recessions are periods when people cut their spending sharply, causing businesses to cut their production of goods and services and lay off workers. It\u2019s mainly because so many people lose their jobs that recessions are something to be feared. But also, a lot of businesses go broke.<\/p>\n This means no one should need economists to tell them if we are or aren\u2019t in recession. If you can\u2019t tell it from all the newly closed shops as you walk down the main street, you should know from what\u2019s happening to the employment of yourself, your family and friends. Failing that, you should know it from all the gloomy stories you see and hear on the media.<\/p>\n Have you heard, by chance, that NSW, Victoria and now Canberra are back in lockdown, leaving some workers with no work to do, and the rest of us unable to spend nearly as much as usual because we\u2019re confined to our homes? You have? Then you know we\u2019re in recession.<\/p>\n When the first national lockdown began in late March last year, real GDP contracted by 7 per cent in the June quarter. That was the deepest<\/em> recession we\u2019ve had since the Great Depression of the 1930s.<\/p>\n But it was also the shortest<\/em> recession we\u2019ve had because, once the lockdown was lifted, the economy \u2013 both consumer spending and employment – immediately began bouncing back. As the Australian Bureau of Statistics revealed this week, the bounce-back continued in the June quarter of this year, which saw real GDP growing by a strong 0.7 per cent, leaving the level<\/em> of GDP up 1.6 per cent on its pre-pandemic level.<\/p>\n All clear so far? The confusion arises only in the minds of those people silly enough to let the media convince them that, despite all the walking and looking and quacking they see before their eyes, a recession\u2019s not a recession unless you have two consecutive quarters of contraction in GDP.<\/p>\n The size<\/em> of the contraction is of no consequence, apparently, nor would be two or more quarters of contraction that weren\u2019t consecutive. This is nonsense.<\/p>\n As my colleague Jessica Irvine has explained, this \u201crule\u201d is repeated ad nauseam by the media, but has no status in economics. It\u2019s a crude rule of thumb that\u2019s frequently misleading. It\u2019s in no way the \u201cofficial\u201d definition of recession.<\/p>\n But the consecutive-quarter rule is so deeply ingrained that it causes needless debate and uncertainty. Some business economists convinced themselves that this week\u2019s figure for growth in the June quarter could be a small negative.<\/p>\n Oh, gosh! Since we know the present quarter will be a negative, that means we could be in another recession. Quick, get out the R-word posters.<\/p>\n But no. June quarter growth proved stronger than expected. Treasurer Josh Frydenberg couldn\u2019t resist the temptation to declare there\u2019d been no \u201cdouble-dip recession\u201d. Thank God!<\/p>\n But wait. The lockdowns could easily continue beyond the end of this month and into the December quarter. So we could have a second negative quarter on the way. Quick, bring back the posters and start writing the double-dip speech.<\/p>\n What we had last year and are in the middle of right now aren\u2019t recessions in the normal sense.<\/p>\n Sorry, this is not only silly, it\u2019s got the arithmetic wrong. When the economy goes from growth to lockdown, you get a negative. But when, in the follow quarter, the economy merely stays in lockdown you get zero growth, not another fall.<\/p>\n The present lockdowns apply to a bit over half the economy. So, if the other half continues to grow, we will<\/em> get a positive change in GDP during the quarter.<\/p>\n What\u2019s more, if the lockdowns end sometime before the end of the December, we\u2019ll get a bounce-back in growth in that half of the economy, as everyone rushes out to start buying the things they were prevented from buying during the lockdown.<\/p>\n That\u2019s what happened last time the lockdown ended; it\u2019s safe to happen this time too. So it\u2019s hard to see how we could get a second quarter of \u201cnegative growth\u201d in the three months to New Year\u2019s Eve.<\/p>\n We\u2019ll learn what the figure was in early March, in good time for the federal election. Stand by for Frydenberg\u2019s triumphant declaration that we\u2019ve avoided a double-dip recession for a second time. He\u2019ll turn the media\u2019s consecutive-quarters bulldust back on them, and spin a story of great success.<\/p>\n But this will literally be non-sense. He\u2019ll take a contraction in the September quarter of, say, 2 to 4 per cent \u2013 as big as the contractions that caused the recessions of the mid-1970s, the early 1980s and the early 1990s \u2013 and pretend it doesn\u2019t count, simply because that massive contraction was concentrated in one quarter rather than spread over two.<\/p>\n He\u2019ll con us into accepting that the depth of a slump doesn\u2019t matter, just its length. More nonsense.<\/p>\n But there remains a respect in which, like the first dip, the second isn\u2019t really a recession. What we had last year and are in the middle of right now aren\u2019t recessions in the normal sense.<\/p>\n