From BS:
We put a simple question to three economists: Is Australia heading towards an actual recession in 2015? Here’s what they had to say:
Saul Eslake, Bank of America Merrill Lynch’s chief economist
“If by ‘actual recession’, you mean consecutive quarters of negative growth in real GDP, then my answer is ‘no’. GDP growth will continue to be boosted by resources exports, with LNG exports coming on stream from the beginning of next year. And there’s no historical evidence to suggest that an ‘income recession’ is a leading indicator of a GDP recession.”
Stephen Koukoulas, managing director of Market Economics
“Recession in 2015? Very unlikely, but recent events have increased the chances we do stumble into one. Those recent events include a pig-headed RBA..[t]he collapse in commodity prices…GDP near 2 per cent in 2015 will feel like a recession for many parts of the economy, but an actual, broad-based recession is still unlikely.”
Craig James, chief economist, CommSec
“No, and there is no such thing as an income recession. If petrol prices fall for two straight weeks, is the petrol market in recession?”
Reassured? I thought not. In truth, it is very difficult for Australia to have a technical recession. With population growth at 1.8% per annum, you’ve got to shrink by at least that much before headline growth falls at all. Having said that, if growth does nosedive then so does immigration so that little trick only takes you only so far.
Not wanting to be left out, the nation’s two most prominent graduates of the Pasconomic school – Glenn Dyer and Bernard Keane at Crikey – share their insight:
The consequences of the Treasurer’s over-the-top rhetoric and his miscued budget are plain to see in the national accounts. But the commentariat risks repeating Hockey’s mistake just when the Treasurer appears to have worked out that bagging the economy and crying “emergency” doesn’t help.
While the growth rate for the year to December was 2.7% — better than the first year of Labor, Joe Hockey proudly boasted yesterday, as if he had a global financial crisis ahead of him — in fact the year divides into two clear halves. In the December (0.8%) and March (1%) quarters, growth ran at an annualised rate of 3.6%, a significant lift on growth earlier in 2013. In the June (0.5%) and September (0.3%) quarters, that fell to an annualised rate of just 1.6%. The tipping point was at the moment the government began ramping up its pre-budget austerity rhetoric, followed in short order by the National Commission of Audit report (quickly abandoned as “a report to the government”, not of the government) and then the budget itself, a masterpiece of political bungling. And the inflection is all the more significant because the Coalition promised that its election and its “open for business” attitude would provide the spark for consumer and business confidence to carry the economy upward. And that coincided, unfortunately with the slump in iron ore prices.
Now the commentariat runs the exact same risk with heedless talk of “income recession”, or even, as some pitched it yesterday, “technical income recession” — a term that basically didn’t exist before yesterday (google it and see how many references there are to “technical income recessions” before this week). Bank of America Merrill Lynch economist Saul Eslake used “income recession” in a research note earlier this week, which led commentators and journalists far less informed and with far less perspicacity to start throwing it around. “GDP: Australia enters income recession, dollar dives as economy stalls” ran a Fairfax headline yesterday, referring to two quarters or more of negative income growth (-0.2% in June and -0.3% in September). Sounds scary, huh? The term both has the terrible word “recession” in it, and is coupled with “income”, as though it’s your very own personal recession, which is even worse.
Crikey calling Saul Eslake “heedless”, riiight…
The phrase “income recession” has existed for as long as there have been income recessions, no longer, no shorter.
As for the old “talking ourselves into recession” line, it wasn’t Hockey’s rhetoric that freaked out households. It was the mooted cuts to income that scared everyone, and confidence has progressively recovered as those cuts have been dismantled. Since then it has been the terms of trade income shocks and capex cliff that have done most of the damage, as yesterday’s national accounts showed very clearly.
Let’s not forget, either, that it was the Pasconomic school of three that attacked Hockey for radically cutting back forecast Budget revenue in last year’s MYEFO. As it has turned out, not far enough. The argument then was the same “don’t scare the horses” claptrap. Had Hockey listened then, he’d now face considerably larger budget write downs and a commensurate credibility gap.
One wonders what kind of economic debate the elite Pasconomic trio would recommend letting settle into the delicate ears of their terrified minions. Perhaps, “house prices only go up” is one. Or, in lieu of that, look everyone there’s a unicorn…
Meanwhile, Callam Pickering has a sensible discussion about recession possibilities:
Could Australia experience a recession in the next few years? Absolutely.
Is it probable? Not yet, but let’s explore how it might unfold.
Speculating about a recession is fraught with difficulties. For one they are very rarely predicted — and almost never by central banks — because they are by their very nature extreme outcomes. Those who do predict recessions are often viewed as crackpots, though when they get it right they get to have their 15 minutes of fame.
Nevertheless, it’s important to understand the risks facing the Australian economy. Firstly, it provides an opportunity to safeguard the system against future shocks. Secondly, it leaves policymakers in a better position to formulate monetary or fiscal policy. Thirdly, it allows us to learn from our mistakes if things do turn pear shaped.
If Australia does suffer a recession in the next few years it will most likely begin in one of three areas: the property market, our major banks or our mining sector. If I was a betting man I’d put my money on either the property market or the mining sector, with the financial sector suffering a second-order shock.
Fair enough.
For what it’s worth, my own view is that the income recession has far yet to run, through much of next year, and the economy will limp along at nastily sub-trend growth as house prices slow then begin to erode. The base case is that this period will not be a technical recession but it will be bad enough that fiscal and monetary stimulus is further exhausted.
That will leave us very exposed when the next global shock does hit (within 2 years or so), with little downside left in interest rates and only room for modest Keynsian fiscal spending before the AAA rating is stripped.
Then we will see a real recession, with no debate about it.
