There is one fundamental misunderstanding that characterises much of the weekend feel-good commentary on what happened last week to global markets. It is the same misunderstanding that characterises the discussion about the prospects or otherwise of recession in the year ahead. It is this: the level of economic activity is not the same as the degree of change in economic activity.
A prominent example is the AFR’s spectacular Sunday sell-job for WA in which it is claimed that WA is still growing at 4-5% and Colin Barnett argues that there never was a mining boom so how can it possibly be ending?
Make no mistake, there was a mining boom, especially in WA, and the reason Mr Barnett wants to tell you otherwise is perhaps the fact that his government has failed to save any of its windfall, with the state on negative credit watch and Moody’s warning today that it will not believe any rosy forecasts for rebounding royalties (as a quick aside, one wonders why it doesn’t apply the same sckepticism to the eastern state’s ludicrous housing stamp duty forecasts).
The important point for this discussion is that Barnett uses the economic ignorance 101 argument for why WA continues to power ahead with “$160 billion” of resource projects, which is not a boom. He quotes absolute levels but fails to discuss rate of change from previous levels, which is actually what matters in economics.
To illustrate, let us say that the WA non-boom had GDP of $50 in 2008. If in 2012 it had grown to $100 GDP and then $95 in 2013, you could be forgiven for assuming that the state is still powering, given how much higher it was than just a few years earlier. But that is not how GDP works.
What matters is the rate of change. In our example, over the past twelve months the WA economy has shrunk 5% and is in a bull-roaring recession.
The absolute level still matters insofar as if the recession began at full capacity then the wind down in growth may see a slide from spectacular metrics to just average. For example, 3.5% unemployment may move to 5% very quickly, which is exactly what we are seeing in WA:
But that does not mean that the state is not in recession, quite obviously.
What of the other argument put in the video? That WA’s state final demand may be shrinking but it ignores exports which would add a lot to growth. It’s probably true. It seems likely that net exports will be adding to growth given that imports of heavy equipment are tumbling while export volumes are holding up.
But it’s at this point that the sensible (or at least the un-vested) consider the limitations of their definitions. The US National Bureau of Economic Research (NBER), whose job it is to measure recessions, uses all sort of benchmarks, including employment, to make its judgement. To the NBER, “recession” is much more than just two quarters of negative growth.
If Australia’s media and politicians stick to ignorantly limited definitions, they can pretend that nothing has changed and offer no explanations for shifting circumstances or their own failings.
But such a strategy can last only so long. The impregnable reality that it’s harder to find a job, harder to turn a profit, harder to reach a surplus will prevail over all of the spin in the world. Just ask the Australian Labor Party.
