Ideas@TheCentre
It’s Hard to Buck a World Downturn
The March quarter national accounts show that Australia has skirted the conventional and necessarily arbitrary definition of recession as two consecutive quarters of negative GDP growth.
Arbitrary definitions aside, there should be little doubt that the Australian economy is in recession. The most fundamental measure of economic and social welfare, real GDP per capita, has contracted for four straight quarters to be down 1.6% through the year ended in March. On this measure, the recession began from the middle of 2008.
Domestic final demand contracted 1.0% in the March quarter, largely reflecting weakness in investment spending. Import volumes, which are highly correlated with domestic activity, fell 7% over the quarter following a 7.6% decline in the final quarter of 2008.
One of the perverse aspects of national accounting is that a decline in import volumes contributes positively to measured GDP growth, adding 1.6 percentage points to the headline growth figure in the March quarter following a 1.9 percentage point contribution in the December quarter.
Together with a 0.6 percentage point contribution from export volumes, net exports contributed 2.2 percentage points to growth in the March quarter.
While it may seem surprising that export volumes are holding up in the context of a global economic downturn, it highlights the fact that the transmission mechanism from the world to the Australian economy is different to the one many people assume.
There has been a closer relationship between the world and Australian economy since the early 1980s, as lower trade barriers have resulted in closer ties with world markets and a larger traded good sector. However, it is difficult to account for the strength of this relationship based purely on trade linkages.
A more important transmission mechanism from the world to the Australian economy comes from our integration with global financial markets following financial market liberalisation and deregulation. Changes in global interest rates and other asset prices are transmitted directly to the Australian economy via global financial markets.
This has a more powerful and immediate impact on the Australian economy than international trade in goods and services. It helps explain why domestic demand has contracted, even though external demand has proven resilient.
Dr Stephen Kirchner is a Research Fellow at the Centre For Independant Studies.
