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”.

GDP hiccup

Yesterday's GDP print took the nation by surprise. Quarter on quarter, real GDP was down -0.5 per cent in the quarter ending September 2016. A negative print of this magnitude is unusual. It had some people asking whether the nation is slipping into recession (which in the crudest of terms is assessed by some as two quarters of negative growth). In today's post, I will seek to dissect the figures to give a balanced assessment on the state of the economy. Let's start our journey with the real GDP growth chart.

On the positive side

According to the ABS, the biggest contributor to the negative print for GDP was gross fixed capital formation (GFCF). The figure that was particularly outstanding was public sector GFCF. When this is examined, it appears to be an anomalous one-off correction, rather than a trend issue.

On the positive side, the GDP print told us that Gross National Income has improved.

We also know that the terms of trade are improving. We have not returned to our per-mining boom levels just yet (an index value of less than 70 on the current index).

The squeeze on profits may be coming to a turning point ...

On the negative side

The pain appears to be coming from the mining states (particularly WA) after the construction phase of the mining boom.

New business investment continues it decline (post the construction phase of the mining boom). Gross fixed capital formation is a measure of net investment in fixed assets (disposals of such assets are netted off gross investments).

Domestic sales growth is flat year or year (before adjusting for inflation).

Total sales growth is similarly anemic.

The level of net saving has ceased its decline. While there was a reduction in the level of savings quarter on quarter this was adding to demand.

Looking to the labour market

If we look more broadly, we can see there are signs of tension in the economy. For example, full time employment is down.

The participation rate has fallen sharply this year.

But we can also see signs of health. The unemployment rate continues to fall and the total hours worked is rising.

Conclusion

While the economy is not going gangbusters, nor is it teetering on the edge of recession. Yesterday's negative print is more than likely the result of an anomalous one-off correction to general government gross fixed capital formation. Beyond that, there is some weakness, particularly in Western Australia, but nothing that points compellingly to an imminent recession.

WA: is it in recession?

With the release of this week's national accounts, there was a lot of breathless reporting that two quarters of negative growth in state final demand meant Western Australia was (technically at least) in a (perhaps domestic) recession.

The counter view, put forcefully by David Gruen from Treasury at a Senate Estimates hearing, was that state final demand does not take into account exports or imports. Gruen argued that some of the analysis was of comic book quality.

While the ABS does not produce a GDP estimate for each state and territory, we can start with state final demand, add the international trade in exports and subtract the international trade in imports to better approximate the state of play. These charts follow.

On this basis, one could argue that WA has only had one quarter of negative growth and, therefore, it is not technically in recession.

On the other hand, I am not a keen believer in using two consecutive quarters of negative growth as the only rule of thumb for identifying a recession. The rule of thumb I prefer is a 1.5 percentage point increase in the unemployment rate within a twelve month period. Let's look at WA in this light.

In these charts we are seeing a rapid deterioration in WA's labour market conditions since the middle of 2012. The number of people in employment is in decline. The participation rate is declining. The number of unemployed persons has grown by over 20,000 people. And, most importantly, the unemployment rate has grown by 1.7 percentage points in 10 months (seasonally adjusted). However, to be fair, the trend unemployment rate growth is still less than 1.5 percentage points.

Furthermore, before coming to a view on whether WA is in recession, it is worth looking at some other aspects of WA's economy.

While dwelling unit commencements are trending up, motor vehicle sales are down and the retail trade is flat (in nominal terms).

Conclusion: you would want more data before firmly concluding that WA is in recession. However, the risks all look to be on the down side. I would not be surprised if in three months time a consensus had emerged that WA is indeed in the midst of a recession.

Tasmania: some things are rotten in the apple isle

This week's national accounts focused my attention on Tasmania, with its six quarters of negative growth. I thought it was time for a more in depth look at the apple isle.

The employment data tells a similar story. Since the GFC, the number of people in jobs has been falling. The number of people unemployed has grown from 12,000 to 18,000 people. The participation rate has fallen. The unemployment rate has risen.

Let's look across some of the other domains of the economy. Dwelling unit approvals are down from almost 300 per month to just under 150 per month (trend).

Monthly retail turnover is sliding.

In short: some things are a bit rotten in the apple isle. 

Recessions

The very first post on this blog was about identifying recessions, based on two consecutive quarters of negative GDP growth. At the time I noted the other definition of a recession: an 1.5 percentage point rise in the unemployment rate over a twelve month period.

Recently I stitched together the two ABS data series on the unemployment rate. The first is the quarterly series from August 1966 to November 1977. The second is the monthly series from February 1978. Because the quarterly series is original data, I have seasonally adjusted it so that it can be compared with the later seasonally adjusted data. The key chart follows:

If I overlay my original assessment of downturns (based on GDP data), you can see my problem. The recessions in the 1970s just do not look right. Also, the GFC qualifies as a recession on the unemployment rate, but just a slowdown on GDP data.

So let's try and mark unemployment recessions from the trough through to the peak, within which the unemployment rate increased by at least 1.5 percentage points within a year. Note, I also count the late 1970s, which only made it to 1.4 percentage points of unemployment growth on trend in a 12 month period.

Just for the fun of it, I can mark both sets of highlights on the same graph. This is a little ugly, but allows for a comparison of my periods. The unemployment method is highlighted in the upper half of the chart and the GDP method in the lower half of the chart.

Conclusions: there is a reasonable degree of agreement between the two indicators of a recession (two quarters of negative GDP growth versus a 1.5 percentage point increase in the unemployment rate in a year). However, although the GDP measure suggests a recession in the early 1970s, it is  more accurately described as a down turn. Furthermore, the GFC did create a short-lived recession in Australia.

Is Tasmania in the midst of a recession?

This week's unemployment figures for the Apple Isle, which have soared since September 2011, had me wondering: Is Tasmania in the midst of a recession?

One definition of a recession is a 1.5 to two percentage point increase in the unemployment rate over 12 months. Tasmania is well and truly in this territory. Its unemployment rate increased by more than three percentage points (seasonally adjusted) in the past 7 months. The trend series has grown more than two percentage points over the same period.

Since October 2011, we have seen a substantial slump in the number of people in jobs in Tasmania. The number of people working now matches the depths of the global financial crisis.

Seven thousand jobs have left the Tasmanian economy in 2012.

The people in jobs to population ratio has been declining since the GFC.

These figures are on the back of the longest slump in real retail turnover since (at least) 1983. From Q1 2010 to Q2 2011 (inclusive) Tasmania experienced six quarters of negative growth in trend real retail turnover. The current rate of through-the-year real growth remains anemically below trend.

House prices are substantially down in Hobart town.

Motor vehicle sales, another barometer of economic activity, are also in decline. It looks like Tasmanians are buying 400 fewer vehicles each month compared with a couple of years ago.

This decline in vehicle sales is out of step with the rest of the county.

Another indicator of Tasmania's plight is the slow down in dwelling unit approvals. Each month, Tasmania is approving fewer units than it did anytime since 2003.

And, at the last print for Q4 2011, through the year growth in state final demand for Tasmania was negative.

Unemployment is up. Retail turnover, house prices, motor vehicle sales and building approvals are all down. I think we can safely conclude, all is not well in the state of Tasmania.