Some media outlets say the recession caused by COVID-19 is over, but they’re wrong

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The recession hasn’t ended. Forget the excitable headlines.

Why are we talking about this?

Because deputy governor of the Reserve Bank of Australia, Guy Debelle, told a Senate estimates hearing on Tuesday that Australia’s economy may have grown a little bit in the September quarter.

It was certainly good news, but that’s as far as he went.

He didn’t say the recession was over. He didn’t say anything close to that.

Nationals Senator Bridget McKenzie asked him how he thought Victoria’s economy was tracking, given the state’s extended lockdowns in recent months.

Dr Debelle said the RBA was releasing some new quarterly forecasts next Friday and those would have more details, but his “best guess” was Victoria’s economy performed a bit better than expected over July, August, and September (despite the lockdowns), and the rest of the national economy grew a bit more than expected.

He said that meant Australia’s economy likely grew a little in the September quarter.

That was it.

So why are we seeing headlines claiming the recession’s over?

Because economists use a range of definitions to pinpoint a recession, and one definition says if your economy experiences two consecutive quarters of shrinking activity then it’s in recession.

And that’s what we’ve had this year.

In the March quarter, the economy shrank by 0.3 per cent.

In the June quarter, it shrank by a massive 7 per cent.

That means for the first six months of 2020, our economy contracted by 7.3 per cent.

It’s a depressingly large number.

It will take years to recover from the damage.

Do you really think the recession’s over just because the economy grew a little in the September quarter?

Economists know better than that.

A confusing definition of ‘recession’

The definition of a recession as being two consecutive quarters of contracting GDP is useful for telling us when a recession has begun. It can also indicate when an economy has started recovering.

But it’s no good at telling us when a recession has ended.

As economist Matt Cowgill from the Grattan Institute pointed out on Tuesday, it makes little sense to say a recession has ended just because a devastated economy has recorded some growth.

“On this metric, the 90s recession ‘ended’ in September 1991, when the unemployment rate was 10 per cent and rising, on its way to a peak of 11.2 per cent over a year later,” he tweeted.

Mr Cowgill’s point was that recessions, once they begin, can build up negative momentum that takes years to arrest, with more damage occurring long after economic activity has started recovering.

To pinpoint when the recession has ended for Australia’s households, we’ll have to see far more people working normal hours again, and the unemployment rate will have to be much lower.

Currently, there are still 930,000 Australians considered officially unemployed.

The official unemployment rate is 6.9 per cent, and it’s expected to keep rising. The official under-employment rate is 11.4 per cent.

In reality, the number of people who aren’t working, or who are working but would prefer to work more hours, are in the millions.

Under current policy settings, it’s going to take years to mop up the damage — especially if the Federal Government winds up its stimulus measures prematurely.

It’s not out of the question that Australia’s economy could record more episodes of negative growth in coming years.

In this month’s Federal Budget, Treasury conceded it could take “about five years” for the unemployment rate to fall to 5 per cent, and for inflation to rise to 2.5 per cent and remain there.

That means Treasury officials think it will take years for the economy to heal.

And that’s all while the Federal Government is planning to deliver many more years of budget deficits to fill the shortfall in private economic activity.

The RBA is meeting next week to discuss what to do with interest rates, and some economists think it could cut the cash rate again, from a record low 0.25 per cent to somewhere around 0.1 per cent.

RBA governor Philip Lowe has already gone on the record to say interest rates probably won’t rise for three or four years.

Does that sound like the recession’s over?

Even if we get more good news from the RBA next week, it’s going to take a long time before RBA and Treasury officials claim any sort of victory.

And remember this — for the last seven years economists have been trying to figure out why advanced economies have been stuck in a low-growth, low-interest rate, high-debt “trap” since the global financial crisis, which officially began in 2007.

Many advanced economies have never truly “recovered” from the GFC.

By business reporter Gareth Hutchens (Original ABC Article)

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