What’s the chance of a recession by Wednesday?

 In Home News Section, Uncategorized

If there’s one word that doesn’t rhyme with re-election, it’s recession.

Bob Dylan might be able to make it work and maybe even Kanye West. But politicians tend to try and avoid the pairing altogether.

Regardless of the circumstances, or the cause, these two terms are never quite compatible within government although they make for wonderful ammunition for any opposition.

And with a federal election that must be called any time between now and the end of May, this week may well prove crucial at the next federal poll.

On Wednesday, the June quarter GDP numbers will be delivered and, until recently, there was every indication we would see a continuation of the phenomenal recovery from last year’s devastating downturn.

Unemployment – the key measure of any recovery – has dropped at an incredible pace since Australia got back to work late last year and by June the official jobless rate was down to just 4.9 per cent.

In the past few weeks, however, it has become apparent that the pace of national economic growth slowed substantially in the June quarter and there now is a possibility that it could even show a slight contraction.

If that happens, there is no way we can avoid a double-dip recession because the September quarter numbers will be truly awful.

What makes a recession?

Our entire system is geared towards growth. Population, consumption, production, income, wealth; everything is expected to grow.

Economists are obsessed with it. Politicians are too. And for better or worse, the way we measure growth is through a crude calculation called Gross Domestic Product, or GDP.

It’s essentially a measure of how much stuff we produce and, given you get swings from one period to another, the generally accepted measure of a downturn, or a recession, is if the economy contracts two quarters in a row.

It’s a dumb measure in many ways that never delivers the true picture. You could, for instance, have two successive quarters, say March and June, where the economy slips mildly into reverse by 0.1 per cent each quarter. That’s called a recession.

But if you have a catastrophic decline in one quarter, of say 2 per cent, followed by another terrible quarter that was only marginally better, that showed growth of just 0.1 per cent from the previous period, well, that’s not a recession.

Clearly, the second example is far more destructive to the economy and society than the first. But if you’re running the show, the last thing you want going into an election is your opponent belting you over the head with the R word. And so, maximising the pain over a short period is preferable to a gentle decline longer term, politically at least.

Ironically, that’s where the government thought it was last year.

With the entire country in lockdown during last year’s June quarter, it looked as though almost all the damage would be concentrated in that period. But the economy was weakening for other reasons, even before COVID really took hold, and when the March quarter figures finally were released, they registered a 0.3 per cent slide.

And so, there was no escaping the headlines screaming: ECONOMY IN RECESSION. FIRST TIME IN 30 YEARS.

You didn’t even need to wait for the June result, which showed an almost inconceivable drop of 7 per cent, as it was obvious we were heading south.

Even the Treasurer Josh Frydenberg conceded early.

This year, unfortunately, is shaping up to be a possible rerun. It will be close. But if a slide occurs, we will have the dubious honour of joining Europe in a double-dip recession.

So, what went wrong in the June quarter?

For a start, the lockdowns began in May, when Victoria had a snap shutdown after a handful of cases, a strategy that pulled the state clear of a medical emergency.

While the economy bounced back relatively quickly as soon as things reopened, it had a significant impact on the national economy, detracting from growth as this graph from AMP Capital shows.

But there were other issues as well. Construction grew during the June quarter but at a rate that was way below expectations. Residential construction actually went backwards in June despite a surge in housing approvals.

Here’s where statistics can mess with your head. Given all the reports of a building boom, how on earth could construction be a problem?

What you have to realise, is that the numbers simply measure the difference between June and the previous quarter. And that March quarter saw construction up 12.4 per cent.

So, there’s still a boom. It’s just backed off a little. But that registers as a decline and that shaves a few points off the overall growth numbers.

There also is likely to be a problem with our inventories and, even worse, our export performance is likely to show a deterioration from the previous quarter. There was good news too, particularly around consumer spending, so it all will go down to the wire.

And if you’ve ever heard that old saying of lies, damned lies and statistics, here’s another conundrum to add to the mathematical mystery.

Even if we do notch up a 0.1 per cent decline in growth for the quarter, we could still produce annual growth of around 9 per cent, mainly because last year’s cataclysmic June decline will drop out of the annual calculations.

If you were Josh Frydenberg, which number would you latch on to?

But wait, there’s more

Okay, so the September quarter, that’s the one we are in now, will be horrendous. We could see GDP slide by anything between 2 per cent and 4 per cent. We won’t know the result for another few months.

Generally, when you have a catastrophic decline such as this, the following quarter, even if it is a disaster, is unlikely to be quite as bad. So that registers as growth and, bingo, you’re out of recession.

It’s all rubbish of course. Just ask those who have found themselves on the unemployment lists.

The problem this time around is that the lockdowns in New South Wales have been a failure. The health system rapidly is becoming overloaded with COVID patients and the case numbers continue to swell.

Victoria, meanwhile, is at a turning point. While it has yet to degenerate into the mess in which its northern neighbour has found itself, case numbers are on the rise and the community is running short of patience.

These states are the powerhouse of the domestic economy driving consumer spending, a vital element in GDP. Lockdowns and restrictions now are likely to be extended well beyond the September quarter, possibly into November and even later.

And don’t expect any other state to drop border restrictions if the case numbers cannot be arrested, a development that will further hit the domestic economy.

While vaccination rates have escalated in recent months, with a welcome easing in death rates, it is unlikely the vaccine rollout will be sufficient to see any meaningful easing of restrictions until late this calendar year.

So, even if we manage to eke out some gains for the June quarter when the numbers drop on Wednesday, the pain may not all be concentrated in this quarter, the September quarter. It could well spill over into the next quarter too although it would have to be dire to be even worse than this.

But it’s all academic really. Whether it technically is a recession or not, there is nothing technical about the rising tide of pain and anger coursing through the community.

And with an election that must be called before May 21 next year, voters had best prepare for a campaign of overwhelming negativity and blame-shifting.

By business editor Ian Verrender (Original ABC Article)