Ideas@TheCentre

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Too good to be true?

Robert Carling | 09 April 2010
That Australia’s economy performed better than many others during the recent global financial crisis is beyond doubt, but a stronger claim is often made in public commentary – that Australia avoided a recession. If such a miraculous escape from the realities of globalisation seems too good to be true, perhaps that’s because it isn’t true.

The claim that we had no recession rests on the definition of recession as two or more consecutive quarters’ decline in real gross domestic product (GDP). This definition is too rigid and arbitrary and its genesis does not justify the weight now given to it. It dates back to a 1974 New York Times article in which an economic statistician suggested ‘two down quarters of GDP’ as one among several rules of thumb for identifying a recession.

Identifying turning points in the business cycle is a task that requires a balanced assessment of a range of economic indicators. Real GDP is subject to significant measurement error and moves unevenly from quarter to quarter rather than smoothly up or down. Even then, real GDP per capita is more meaningful in the context of Australia’s brisk population growth.

Australia did not have two consecutive quarterly declines in real GDP, but on a broader and more balanced assessment we did have a recession, albeit a brief and shallow one. Employment declined for six months; total hours worked fell for 12 months by a total of 2.4%; the unemployment rate rose by 1.6 percentage points in less than a year; and business investment and home building activity contracted sharply.

This argument is not merely an academic quibble after the event. Even though the quantitative margin between having a recession and not having one was small, the qualitative difference between those outcomes is immense. If the assertion that Australia avoided a recession goes unchallenged and becomes woven into the annals of economic management, aggressive fiscal stimulus will be viewed in a more favourable light than it deserves, and is more likely to be repeated in future downturns.

Robert Carling is a Senior Fellow at The Centre for Independent Studies.