Phil Ruthven weighs up the combining forces of Australia’s economy and asks whether current factors point to an inevitable downturn.

    The word recession connotes fear, but the word depression suggests terror. A recession occurs when we have two or more quarters of negative economic growth, usually converting to a negative year overall; and a depression occurs when we have two or more negative years, usually four in a row for Australia.

    Fortunately, we have had only four depressions in 227 years, the last one ending over 80 years ago in the 1930s and fewer recessions than in the industrial age, when we had 20 over a 100-year period or one every five years on average. However, we have only had two over the past 50 years since the new infotronics age began in 1965. The last one was 23 years ago, ending in 1992 as shown in the figure. We return to the prospects of another one shortly.

    The facts

    Half of today’s workforce of 11.8 million has never experienced a recession in their working lifetime; and this carries the risk of the boiling-frog syndrome whereby complacency sets in, productivity growth slows, deficit spending can become a habit, workplace reforms are put off, and unemployment rises. This is Australia today. Greece is an extreme example over a much longer period: two generations at least; and now a “classic basket case” as they say.

    Strangely, we may be better off to have another recession sooner rather than later to correct the above drift, notwithstanding we have a very low national debt and a relatively modern economy. The nation has had reform paralysis for much too long; and that is dangerous given our new economic and social homeland of Asia, the biggest, most dynamic and fastest growing region of the world, where we will be trading and competing for a century or more.

    We need workplace reform involving penalty rates, contractualism (to reward on outputs not inputs), more worker freedom and flexibility. We need reform in our parliament (Senate election protocols); in our federal budgeting (the deficit habit); in our taxes (GST in particular); in our negative productivity in government-owned activities (22 per cent of the nation’s GDP); in our society (more fairness, but also more self-reliance), in our energy policy area and more.

    Cause of recession

    However, while all these issues are important to our rising standard of living, indeed critical over the longer term, the cause of recessions lies elsewhere. Markets pull the economy (GDP) along, not production. There are three major sectors in the marketplace: overseas expenditure (our exports); consumption expenditure (households and government on our behalf); and capital expenditure.

    Exports do turn negative in growth but rarely, and even those occasions have not been severe enough to trigger a recession in our new infotronics age over the past 50 years.

    Consumption expenditure has not turned negative since WWII, so has never caused a recession in the lifetime of most Australians unless they are well over 75 years of age.  One of the factors that has helped keep consumer spending in the positive zone is the dominance of services in household spending. 

    A century ago, goods once consumed more than two thirds of household budgets, but now that is only a fifth due to manufacturing productivity and more recently, cheaper imports.

    Indeed, in 2013, household spending on outsourced chores and services exceeded retail goods spending for the first time in history. Consumers are less likely to stop or curtail spending on services than goods, especially durables. They will still pay for electricity, insurance, health, education and even entertainment of one form or another. The facts show this to be true over the past six or more decades.

    That leaves the only market sector that can cause recessions: capital expenditure. The two recessions we have had in this new age were caused by a collapse of more than eight per cent in a given year. This happened in the 1982 to 1983 and 1991 to 1992 recessions.

    Business cycles

    However, going back to the figure, dotted lines are shown around every eight and a half years on average. This is what economists call the long business cycle; and it is at the end of each of these periods when our economy is susceptible or vulnerable to a collapse in capital expenditure.

    It was in 2000 to 2001, but was averted by the Howard/Costello initiative in housing construction with the first home buyers grant, which doubled the following year to make sure a recession was averted.

    We missed a recession in 2008 to 2009 too, due to the massive backlog of mining capital expenditure. The Rudd Government’s fiscal stimulus was unnecessary and a panic reaction. We didn’t need any bolstering of consumer spending power: mortgage rates had collapsed from 9.25 per cent to 5.25 per cent from 2008 and petrol rises had fallen sharply, enough to free up over $10,000 in after-tax money for the majority of households.

    Perhaps it should have been suggested the public spend some of it rather than give them more, and at the same time let them know we were not going to experience a GFC as we had no national debt.

    But the looming risk of a recession in 2017 to 2018 at the end of the current long business cycle is very real. More than 25 per cent of our capital expenditure (itself 28 per cent of GDP) was going to the mining boom until recently. At least 10 per cent of this or more will have gone by 2018, so filling that hole is the challenge in avoiding a recession. Governments are largely aware of this risk, hence the drive into more infrastructure spending.

    We have a couple of years to fill this hole, otherwise a probable recession is in train. But in the absence of serious reform vision, initiatives and courage, it may not be a bad thing if we had one to shake us out of lethargy.  Another one “we had to have” so to speak.

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