Australian Recessions

We have lived through more than 12 months of the advocates for an immediate central bank interest rate cut saying that if we don't get a rate cut this month, the economy will enter a recession.  So far those advocates have been wrong. It reminds me of the Paul Samuelson joke: “the stock market has predicted nine out of the last five recessions”.

When we think about recessions. many people adopt the definition of a technical recession: two or more quarters of negative GDP growth (Q on Q). It's a useful rule of thumb, but it can miss significant economic contractions that are interrupted by a quarter of smallish growth. Focusing on technical recessions can also elevate short, slightly negative events that are not as serious. The working definition I use is that a recession is an extended period of economic contraction and an associated decrease in the number employed and a substantial increase in the unemployment rate.

While Australia's economic growth is in the doldrums, the economy is some way from a recession. And our labour market performance has been strong. On average, a recession happens about once a decade. Naively, without considering the economic fundamentals, the probability of a recession in 2025 is around 10 per cent. 

Using the above definition, I have looked at six factors that could indicate a recession. They are: 

• GDP Technical Recession, 
• Negative Annual GDP Growth,
• GDP per Capita Technical Recession,
• Rapid Unemployment Growth,
• Employment Technical Recession,
• Negative Annual Employment Growth,

The charts for these indicators follow.

Individually, there is a lot of noise in the above charts. To overcome this, I have looked at those periods of time where three or more of the above six indicators are positive. This yields a clearer picture of when the economy has been in recession: the early 1960s, the mid 1970s, the late 1970s, the early 1980s, the early 1990s, and most recently in 2020. In each case (but one), the recession saw a year over year decline in both the size of the economy (GDP) and the number of people employed. Other less severe events in terms of the Australian economy include the 2008 global financial crisis, the dot-com bubble of 2000, and a slowdown in the early 1970s. 

Only three recessions over the past 65 years have seen all six triggers activated. 

Note: I last looked at Australian recessions in 2012. In this exploration, I have come to slightly different conclusions.