The Australian recession

The national accounts were released today, with a recorded increase in our Gross Domestic Product (GDP) of 0.4% between Dec 2008 and March 2009. This means that Australia has avoided what is sometimes referred to as a “technical recession” (ie two quarters of negative growth).

The first thing that needs to be stressed is that Australia did experience a “per-person recession”. Population growth is about 0.4% per quarter and the last four quarterly GDP growth figures have been 0.3%, 0.2%, -0.6%, 0.4%… so while the country may be producing more as a whole, each person is producing less.

My optimism about the current recession is on the public record. However, before any optimists gloat about the latest figures, they need to be put in the appropriate perspective.

First, it should be remembered that GDP measures how much we produce, not how much we consume. The difference is net exports. And the national accounts show that gross national expenditure decreased by 1% in the March quarter.

The reason that GDP grew was that exports increase (2.7%) and imports decreased (7%).

Our exports have held up fairly well in general. While export volumes dropped by 13.9% in Japan, 10.2% in Singapore, 8.9% in Korea, 7.5% in China, 7.3% in Germany, 6.5% in the USA, 4.7% in Canada & 3.9% in the UK… they only decreased by 0.8% in Australia (in the December 2008 quarter).

The fact that Australia’s recession will be smaller and shorter than the rest of the world is due to our better starting position, no large underlying problem, and our relatively strong trade performance.

It is not because of government policy.

True, the government handouts have given a temporary boost to consumer spending. In the March 2009 quarter household consumption grew by 0.6%. Without the handouts this would probably have been lower. But this “benefit” is temporary and marginally important at best.

Importantly, the driver of long-run economic growth and employment is private business investment, and that has declined this quarter by 6.1%. While the government will be quick to take the credit for the 0.6% household consumption number, they will be slower to accept the blame for the -6.1% business investment number. And it’s true that business investment would have been negative anyway. However, there are reasons to believe that government policy harms business investment… both due to crowding-out and by increasing the political risk premium.

But I’m still an optimist. While the government may delay private investment through their bad policy, they cannot stop it rebounding eventually. Touch wood.

UPDATE 04/06/09: An edited version of this article was published at Open Forum.

17 thoughts on “The Australian recession

  1. This is my perspective…
    America’s Great Depression by Murray N. Rothbard


    “In the pleasant but illusory world of “national product statistics,” government expenditures on goods and services constitute an addition to the nation’s product. Actually, since government’s revenue, in contrast to all other institutions, is coerced from the taxpayers rather than paid voluntarily, it is far more realistic to regard all government expenditures as a depredation upon, rather than an addition to, the national product.

    In fact, either government expenditures or receipts, whichever is the higher, may be regarded as the burden on private national product, and subtraction of the former figure from Gross Private Product (GPP) will yield an estimate of the private product left in private hands. The ratio of government depredation (government expenditures or receipts, whichever is the higher) over Gross Private Product yields the approximate percentage of government depredation of the private product of the economy. [21]

    In a depression, it is particularly important that the government’s fiscal burden on the economy be reduced. In the first place, it is especially important at such a time to free the economy from the heavy load of government’s acquiring resources, and second, a lowering of the burden will tend to shift total spending so as to increase investment and lower consumption, thus providing a double impetus toward curing a depression.” pg. 291

    – For the extended explanatory footnote please see pg 292, via the link above.

  2. I think the government is more likely to claim that it’s policy was designed to prevent job losses rather than to avoid recession. As such you might be judging it against the wrong criteria. Not that I expect the conclusion would change.

  3. The new debate will be the socialists saying that the economy is better THANKS TO their interventionist policies and we saying that it is better IN SPITE OF their interventionist policies.

    They still believe (and what is worse, they MAKE PEOPLE BELIEVE) that the state can ‘create’ jobs, without taking them away from the private sector.

    A basic fallacy which continues to mislead people.

  4. GDP is a terrible metric to follow to see if we are in recession. And its a horrid metric for quarter-to-quarter comparisons. Its a scandal that the economics profession hasn’t got its act up to date on this score. Rudd has done everything he could do to retard recovery. All he’s managed to do is rig the GDP metric to the detriment the public.

  5. Our strong export performance was mainly due to China stockpiling base metals using its trade surplus, instead of buying US dollars. The copper price has gone up considerably because of it.

    Thus we have (so far) avoided a technical recession purely because the Chinese think the US dollar is not as safe as it used to be, due to Obama’s massive “stimulus” and public debt. Rudd’s luck will run out soon.

  6. Quick to take credit for any positive news. I don’t see Rudd taking credit for the extra 170,000 or so now unemployed in the last year.

  7. I don’t think Obama screwed up the US dollar prospects all on his own. He had a lot of help from his predecessors in the White House and in Congress.

  8. i read today that the increase in exports (that gave such a strong GDP reading) was down to a change in the way the ABS calculates exports.

  9. Well… the government is certainly trying to create trouble in the property market with their stupid First Home Owner Scheme.

    And they’re holding down private investment (and even exports) with their stupid fiscal policy.

    And they’re slowing down market flexibility with their stupid IR policy and the continued over-taxing and over-regulation of our economy.

    If they stopped trying to hurt the economy I think it would recover quite easily. If the government ramps up their stupidity (for example, Greens policy), I think they could destroy the economy quite easily.

    But with their current level of stupidity… I think they’ll slow the recover, but won’t stop it.

    Though of course, much of our fate rests with the world economy. And as nobody knows where the world is going, nobody can be sure about where we are going.

  10. Pommy could be right about property. However even a crash in property isn’t the end of the world. Just a bloody big mess.

  11. Two flamingly obvious points emerge from the growth statistic..

    1. The Australian dollar was at a comparitively low level during most of this period, thereby making a possibly lower volume of exports seem financially worth more.

    2. MOST IMPORTANTLY Australia’s main exports of beef, coal, timber and iron ore are contributing to the destruction of the planet through greenhouse gas emission.. The sooner these exports are curtailed and then banned, rather than expanded, taxed or reduced, the sooner Australians can lift their heads with some degree of pride and reinhabit the forested areas of the SE corner safely.

  12. Now if we are to accept the Keynesian model, which I don’t… even by the government standards, they fudged the numbers.

    “For some reason, they used the revised price index in this quarter’s figures–one quarter earlier than normal. These revised contracts have much lower prices–up to 40% falls for some commodities–so the resulting price index was much lower. (Thanks to Gerard Minack of Morgan Stanley for the detective work on this).”

    “So putting this all together (looking just at C+I+G+X components), the probable outcome for real output in the last quarter was a fall of the order of 1-2%, or an annual rate of decline of 5-8%.”

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