What is a recession and are we in one? A bluffer’s guide

As Michele Bullock explained why the Reserve Bank had lifted interest rates for a fifth time this year on Tuesday afternoon, Australians hit Google.

Something the RBA governor said in response to reporters’ questions caught their ears and got them wondering.

“We are not looking to tip the economy into a recession if we can avoid it,” she said.

It was that word – recession – that caught Australians’ attention.

Google Trends’ measure of searches for the word “recession” reached its highest level since 2020, when the nation went into an actual recession, and its third-highest on record.

There were also spikes in searches for answers to questions such as “what happens if Australia goes into recession”, “when was the last recession in Australia” and “what to do in a recession”.

All of this activity begs the question – what is a recession?

The two ways to tell you’re in a recession

There are two generally agreed upon definitions.

The most common in this country is two consecutive quarters of negative economic growth. Since World War II, there have been eight of these types of recessions.

But there are problems with this definition.

Most famously, then treasurer Paul Keating declared “this is the recession that Australia had to have” in November 1990 after the just released September quarter national accounts showed the economy had contracted by 1.6 per cent following a 0.9 per cent drop in the June quarter.

Two negative quarters equalled a recession.

But that negative quarter of growth in June has been erased over time as the bureau of statistics collected more information. Keating never had to make his famous declaration.

A small recession in 1977 only appeared after revisions by the bureau. At one point, a recession in 2000 was just a few million dollars away from appearing in the official statistical measure before later revisions confirmed the economy had avoided the global dotcom bust.

The two negative quarter growth definition obscures how not all recessions are equal.

Australia’s most recent recession – at the start of the pandemic in 2020 – was missed by most people as governments thrust hundreds of billions of dollars into the nation’s collective wallets while the Reserve Bank printed hundreds of billions more and sliced official interest rates to 0.1 per cent.

This recession was effectively government policy as Scott Morrison and Josh Frydenberg shut the economy to prevent mass deaths at the hands of COVID.

Through the first six months of 2020, the economy contracted by 7 per cent. It was the steepest decline since the Great Depression in the 1930s.

But it wasn’t accompanied by a surge in unemployment which would peak at 7.4 per cent. People weren’t sacked en masse or saw their businesses collapse like a “normal” recession. Most Australians ended up in a stronger financial position due to all those handouts and record low mortgage rates.

The 2020 recession is why some economists prefer using the jobless rate as an indicator of economic bad times.

It’s best illustrated by the “Sahm rule”, a rule-of-thumb created by American economist Claudia Sahm.

Under her definition, a country is on its way to recession if the jobless rate over a three-month period is half a percentage point higher than any other three-month period recorded during the preceding year.

In Australia, the jobless rate averaged 4.63 per cent between July and September. Between December and February, it averaged 4.17 per cent. That’s a rise of 0.46 percentage points, just short of the Sahm rule.

HSBC Australia chief economist Paul Bloxham noted this week the Sahm rule was a clear warning of the economy’s weakness.

He said that given the Reserve Bank’s effort to bring down inflation, “the risks are rising that Australia’s economy will have a harder landing – or even a recession”.

In the doledrums

Mass or long-term unemployment is a real concern for the Reserve Bank. In a country with enormous mortgages, the loss of a regular paypacket for a sizeable proportion of the population would create a spiral of economic troubles starting with the nation’s big four banks that stand or fall with the Australian property market.

The 1890s depression was centred on runaway property speculation in Melbourne. Of the 64 banks and credit union-like institutions that were operating in 1891, 54 had closed by mid-1893 (with 34 of them closed permanently).

One-in-10 homes nationally, with a much higher ratio in Melbourne, were repossessed.

A recession definition is one thing. But, as Bullock noted this week, an economic slowdown or a blast of inflation has real-world consequences.

“The fact that we’ve had this massive shock has meant that we’re poorer, and that’s what people are feeling,” she noted.

It’s not just people feeling poorer. So are businesses.

A yet-to-be released survey by MYOB of 370 mid-sized businesses found their costs, including fuel and energy and insurance, had climbed by $6700 a month over the past year.

More than a quarter said their costs had lifted by at least $10,000 a month, with firms employing between 200 and 500 staff particularly hurting.

Just one per cent said their costs had not increased at all.

MYOB executive general manager (mid-market), Paul Voges, said almost half of surveyed firms had sunk money into efficiency measures or renegotiated with suppliers in a bid to put a lid on their higher costs.

Recession definitions

1. Two quarters of negative economic growth
2. The “Sahm rule” – average unemployment rate over a three-month period is half a percentage higher than any three-month period over the previous year
3. America’s National Bureau of Economic Research determines a recession in the US. Its working definition is a “significant decline in economic activity” which can occur over a shorter period of time or more than a year

“These actions won’t remove every pressure, but they highlight how businesses are adapting their operations in a more demanding cost environment while keeping improvement and growth firmly on the agenda,” he said.

Negotiating with suppliers for better deals is one way to reduce costs. Another is to sack staff, something that happens in recessions.

Job losses are starting to mount

There was a stark reminder of that this week with a slew of job losses announced.

Australian software company Canva said it would axe up to 22 per cent, or almost 1300, employees. Another AI company, Melbourne-based Heidi, revealed plans to shed 108 positions.

Petroleum producer Woodside is getting rid of at least 500 staff while there are major doubts over hundreds of positions with 188-year-old retail behemoth David Jones now in administration.

Those being let go confront a softening jobs market.

The Bureau of Statistics this week reported there were 325,000 job vacancies across the country in August. In that same month, there were 706,000 people actively searching for work. In other words, more than two people for every job opening.

Compare that to August 2022, after the economy had fully reopened from its COVID-induced slowdown. In that month, there were fewer than 499,000 people officially unemployed with companies advertising 477,000 job vacancies.

Why it feels this bad but isn’t a recession

For all the talk of a recession, the economy continues to grow – albeit at a slower rate.

Neither the RBA nor the federal Treasury are forecasting the economy to shrink.

“We’re very alive to the pressures on growth, but neither institution is anticipating or I believe, as far as I’m aware, war-gaming the economy going backwards for a couple of quarters,” Treasurer Jim Chalmers noted.

One of the reasons for that is the AI construction boom that is contributing to the inflation pressures the Reserve Bank is countering with higher interest rates.

Figures from the Deloitte Access Economics this week showed the nation’s infrastructure pipeline has reached a record $1.4 trillion. It is being driven by AI data centres, and often the power sources needed to run them.

Deloitte estimates the AI boom will be larger than the mining boom of the 2010s. But, unlike that boom which happened in outback Queensland and the north-west of WA, this is playing out within eyesight of the nation’s growing suburbs.

“This boom is happening close to our major cities, so data centres are competing directly with housing and infrastructure for workers and materials,” Deloitte director Stephen Smith said.

Oxford Economics’ director of global macro research, Ben May, argued this week that the circumstances that delivered recessions in the past – high oil prices, increases in interest rates, over-investment in a particular part of the economy – are eerily similar to the economic situation facing many nations today.

But he said it would take a collapse in the AI boom or a further escalation in the Iran war to really drive the globe into a deep recession.

“Compared with the 1970s and 1980s, economies are better positioned to weather shocks. Indeed, the resilience of the world economy to the events of the past couple of years is testament to this,” he said.

That view, of course, ignores that shocks are just that – shocks. For instance, no one was expected the 2020 global recession unleashed by COVID.

The AI boom that is powering the US, Australia and many other nations could come apart. At this week’s US midterms, American voters supported more than 40 ballot initiatives to slow the data centre rollout.

More worryingly for the tech bros, these initiatives won bipartisan support.

In Butler County outside of Wichita in Kansas, Republican Rob Estes attracted 64 per cent of the vote. Seventy-one per cent of the county backed a data centre and battery storage system ban.

The new word that sums up the whole crisis

Back in Australia, Michele Bullock’s deputy, Andrew Hauser, this week said the globe was in a “VUCA” period. VUCA stands for volatile, uncertain, complex and ambiguous with the world facing a “fusillade of shocks from tariffs, wars, geopolitical tensions, pandemics, and technological and environmental change”.

He warned this meant the chances were increasing of a central bank getting its policy settings incorrect.

“That means inflation is more likely to be pushed off target; economic forecasts are more likely to be wrong; and policy trade-offs get uglier,” he said.

People won’t need a Google search to discern what that all means. They’ll feel it as a recession.

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