Recession strikes fear into many and pain isn't evenly shared

Remember the good old days? The time when life was simple and opportunities endless?

Except of course, often they aren't always so great.

Last week, Reserve Bank governor Michele Bullock batted away the idea that a recession was inevitable but finally conceded that unless inflation was brought to heel in a timely manner, it was a possibility.

"If we don't address this, inflation will get worse, and interest rates will have to be higher, and the economy in a worse position in order to address that,"

she said.

"So, it's not our base case, I don't want it, but if inflation expectations get away, that's the sort of scenario you might be looking at."

Defining a 'recession'

Pandemic aside, we haven't experienced a recession — one where the catalyst was rising interest rates — since the early 1990s.

It's a word that strikes fear into many in the community and for good reason.

For those who've lived through one, including economists and policymakers, it can be a life-altering experience, one permanently seared into the memory.

Like most economic phenomena, the pain is not evenly shared across the community.

It might be an obvious observation but it's worth noting that those most acutely impacted are those who lose their jobs.

Officially, a recession occurs when the economy contracts for two or more consecutive quarters. But that is a deeply flawed construct.

Rather than economic growth, recessions are best measured through unemployment statistics, and the uneven burden of a downturn inflicts upon society.

If you don't have a job, you'll struggle to put a roof over your head and, if you have dependents, you'll face a series of heartbreaking decisions that will permanently alter their lives.

If past experience is any guide, serious economic downturns usually result in mass job lay-offs.

We've been here before

The 1980s was a fascinating time to be covering business and finance.

Paul Keating floated the currency in 1983 and deregulated the banking system, paving the way for a wave of brash and aggressive entrepreneurs to take on the business establishment.

But as the 1980s drew to a close, the writing was on the wall.

A massive build-up of debt and a corporate sector unrestrained by any sense of propriety culminated in what became known as the Decade of Greed.

It all came to a shuddering halt on October 19, 1987, otherwise known as Black Monday, when Wall Street was shaken to the core.

The market shed almost a quarter of its value in a single session, 22.6 per cent, taking markets with it and cratering confidence amongst investors and consumers.

Central banks and governments initially flooded the system with money to ease the pain. But that only served to exacerbate an inflation problem that had been raging throughout 1987 with Australian inflation stubbornly sitting above 9 per cent.

Then they switched course. Like central banks everywhere, the Reserve Bank of Australia sent official cash rates into the stratosphere. The official cash rate was jacked up to a punishing 17.5 per cent, sending the economy into a spiral.

Jobs the biggest casualty

Economic growth collapsed. According to then prime minister, it was "the recession we had to have".

But it was the jobs market that reacted first, long before any official declaration of a recession. And it was the jobs market that took the longest to recover.

Almost every day, as conditions tightened, major corporations announced staff lay-offs by the thousands as they desperately tried to slash costs in a bid to stave off the impact of reduced consumer spending.

As unemployment soared, economists wedded to economic theory and definitions, many of whom had been briefed by Treasury, vehemently argued with media commentators and anyone else raising the alarm about the state of the economy.

It wasn't a recession, they smugly argued, because we hadn't yet had two consecutive quarters of a contracting economy.

By the time the GDP figures officially registered the obvious, it was too late. The RBA spent much of 1990 dialling back on interest rates which helped pull the economy out of its nosedive.

Rather than "sticky inflation", we were stuck with a much bigger social problem.

Unemployment soared to more than 11 per cent. In those days, Australia was a still an industrial country with a sizeable manufacturing base. But the 1990 recession was a catalyst to change much of that.

Have we learnt anything?

According to the official growth figures, measured by Gross Domestic Product, Australia's recession lasted one full year, from the September quarter of 1990 through to the corresponding quarter in 1991.

By mid-1991, the inflation genie had been firmly put back in the bottle, dropping from almost 9 per cent to just above 3 per cent.

Job done!

But that doesn't tell the full story.

As the graph above illustrates, it took a full decade, until almost the turn of the century, for the unemployment rate to drop back to pre-recession levels.

For anyone who left school or university, it was a lost decade.

Many struggled to establish the career they had chosen. Some never found a job at all as long-term unemployment became entrenched within the economy.

It was a deeply scarring experience and almost every economist or politician who lived through that era visibly blanches at the idea that we should simply send a generation of workers to the scrap heap by radically shoving interest rates into the stratosphere.

Thankfully, right now, unemployment is surprisingly low.

Ever since the pandemic, for reasons largely unknown, the proportion of the workforce not gainfully employed has been at historically low levels.

For decades, the dirty secret within the economics profession is that you need around 5 per cent of the workforce sitting on the sidelines to ensure inflation is kept in check.

Right now, we have an unemployment rate of just 4.6 per cent. It has been climbing for the past few years, up from the 3.5 per cent low in the wake of the pandemic.

And by historical standards, it is still low even as the RBA tightens rates to their highest in 15 years.

The RBA governor argues that it is possible for the unemployment rate to rise without serious job losses.

"The unemployment rate has risen from 3.5 per cent over the past couple of years to 4.6 per cent, and in that time, there's been over a million jobs created," she told reporters at the post rate hike press conference.

"I don't like the idea of job losses. We'll do what we have to do to get inflation down because we need to. But if we can avoid massive job losses and a massive increase in the unemployment rate, that is a really important thing to be able to try and do."