Well Australia has avoided a “technical recession” for now so I guess this means that if you have lost your job or your business is struggling then technically you are actually doing fine. But if we are not in a recession, why are company profits taking a beating, unemployment rising and the stock market still so low?
The answer is that of course we are in a recession and most people can feel it, but as I outlined back in March we would end up in a pointless debate about what sort of recession we are having (see: The recession, economic stimulus and the stock market) and that is what is happening now.
In economics it is generally accepted that when an economy experiences at least two quarters of GDP contraction then it is in a recession. But like so many things in economics this makes little sense, just like the almost blind faith in economic models.
For example if you had one quarter where the economy contracted 5% and then the next month it grew by 0.1% then technically the economy is not in recession, but of the course in reality the economy would be struggling. Perhaps the economic model used by Treasury may indicate Australia is not technically in a recession, but that just highlights again the limitations of their models.
The situation at the moment is the Australian economy went backwards 0.6% in Q4 last year and has grown (according to the number crunchers) by 0.4% in the first quarter of this year. If we engage our brains and ignore the desk bound boffins, then common sense tells us the economy is struggling and according to the data over the last six months it has indeed slipped backwards.
Of course the latest economic data is good news, but we should not start thinking the good times are back. We should just accept the latest economic data for what it is, a very mixed bag that indicates that overall the economy is not doing well. Mining exports might have pushed the economy into the black in Q1, but in Q2 the lower prices for coal and iron ore (and a stronger $AUD) are going to hurt.
I would hope that anyone capable of rational thinking would appreciate that the only reason we are not deep in recession is because of the demand for our exports and not because of the way the Government has managed the economy. This would be true no matter who was in power now, but the real test for the Australian economy is how it will finish 2009.
So here we are in the recession twilight zone. Both sides of politics will massage the data to suit their arguments, various economists will give their opinions on what the numbers mean and an array of other assorted clowns will enter the fray. Of course as I mentioned in my post in March we will not know what sort of recession the nation has suffered until it is all over, end of story.
Although Australia is benefiting from strong exports we still import more than we earn from these exports, therefore we are still sending money overseas to pay for the way we live. Of course as long as we can service this debt then in theory all should be fine, but we may see a generation of Australian’s that are in debt in some form for most of their lives.
On top of this we also need to remember the $300 billion or so of Government debt that is building up, so as a nation we are counting on both soft and hard commodities keeping us in the lifestyle we have grown accustomed to. Thus as a nation we are assuming that in the future we can pay off this debt but we have not actually considered in detail how this will be done.
We are in a Catch-22 recession. On one hand we will have people telling us that we are not in a recession because we have had growth in the last quarter, but we also know that company profits are down, unemployment is rising and business investment is falling.
The government will look smug and say their economic stimulus measures are working, but they will not cut back on future spending because they will say the economy may slide back into recession if they do this.
And how do we know were in a recession? Well you have to be objective and look at the underlying data such as imports falling 7.7% this does not suggest growth. But if we think we are in a recession and some data suggests this is so we sill may not be, technically speaking.
The catch is if we are in an economic downturn then the Government will keep spending, but if the economy is growing then there is no need to spend billions of dollars on questionable projects and the Government should scale back it’s economic stimulus measures. But if these projects were now to be cut this may actually result in the economy slipping into recession later.
What is the solution? Well it is basically too late now for the Government to change direction, they have committed themselves to spending big and that is what will happen. Throwing large sums of money at any problem often results in some short term benefits but I doubt we will get much value for money from the way taxpayers money is being tossed around at the moment.
If the Government had simply scrapped the Emissions Trading Scheme and provided incentives for companies to cut CO2 emissions we could have met our international obligations (as silly as they are), protected jobs and supported the economy through the recession without going into a massive amount of debt.
But we are where we are, and with any luck the rest of 2009 will not be brutal. Hopefully by the time the Australian economy looks like it might be in serious trouble global demand will pick up and save the day….for a while anyway.
But I hope at some point as a nation we realise how we have failed to broaden our economy, because it might serve us well now to be Asia’s mine and farm but in the next few decades we might find ourselves in serious trouble if we remain that way.