Jun

4

Where’s the recession?

June 4, 2009 | 10 Comments | Joshua Gans

For many months now, I have been telling the continual tide of journalists calling to ask about the economy that (to paraphrase Bob Solow) “the recession is everywhere but in the statistics.” My expectation was always that it would appear in the Australian statistics. However, over the past couple of months the statistics have looked less and less recession like: unemployment down, consumer spending up, exports surging, house prices approaching their 2007 peaks and now GDP growth, the gold standard of recession monitoring, is up. Now people will point to various components of the statistics and dig deep to find worrying points but when it comes down to it, this wasn’t the recession that we expected to struggle to prove was there. Indeed, and I know this is completely unscientific, people don’t seem to be that recessed.

So let’s consider the alternative hypothesis that, for the second time in a row, Australia escapes a world-wide recession. What factors might account for this?

1. Pre-emptive fiscal and monetary policy: Australia appears to get recessions with a lag. Because of that the powers-that-be had time to engage in economic stimulus and that by doing that pre-emptively it actually worked a la, pure Keynesian economics. Sure, no one expects cash handouts to do much in the way of boosting consumption. Sure, no one expects that first home buyer handouts are so large as to impact on housing markets. But then again, maybe they do enough.

2. Concentrated/regulated banking sector: Australia has had no large bank and financial institution failures. This is critical for, even if there isn’t as much lending going on now, there was likely sufficient liquidity so as not to disrupt day-to-day operations of businesses and markets. Now it could be our system of prudential regulation that did this but I have not been clear on the mechanism by which that translates into less activity in riskier financial instruments as there is no prohibition on that. Instead, it seems more likely to me that a lack of competition meant that less risky bank activities were enough and that there was no pressure to take risks in order to stay in business. That isn’t a perfectly fleshed out story either but, let’s face it, it doesn’t hurt for solvency to have some high margin banking areas not facing intense competition. (And I should add, that whole notion doesn’t give me much comfort as a desired outcome). That said, the government’s move to guarantee deposits at a critical juncture as well as injecting funds into housing and construction were likely decisive in seeing out financial institutions through this at very little relative cost.

3. Wealth effects: or specifically, a lack of wealth effects. Prior to all of this, Australia had the fourth largest pool of private savings in the world thanks to our system of forced savings. The financial crisis has wiped out a large share of that. Everywhere else where individuals suffer such losses, it has translated into a reduction in consumption. Here, that hasn’t happen. So let me speculate as to why (again not being too scientific). Lots of people (including myself) who are not retired or near it, treat super as a tax. We give it up and don’t expect to see it again. We get 6 monthly statements that are interesting but again, they tell us little of immediate consequence. So when the balances rose, we didn’t take comfort. But the flip side is as they fell (and reading my recent statement, I lost more than I put in last year), we didn’t care either. Put simply, Australian investment involves no wealth effect on economic activity. So that means there was no panic to cash (at least of large measure) as markets fell and no panic of a reduction in consumption. In a sense, set it and leave it, coupled with no regard for the future has left us behaving as if we are extremely patient.

4. Asia: the traditional view on Australia’s exposure to world economic crises is that if Europe, Japan and the US tank so do we. But in actuality, the past twenty years have been no picnic on that front but Australia has been pretty resilient. The alternative hypothesis is that it is East Asian economic performance that now drives our economy and while that too has been buffeted by the crisis, there is so much economic activity there relative to the size of the Australian economy that we could continue on regardless (hence, the export boom contributed to by resources and education exports). Some macroeconomists will look at GDP synchronisation and can work out if that is true or not but it does potentially explain why we might be seeing this whole thing through.

Now I am not willing to call this “mission accomplished” based on anything thusfar. The only thing I know these days is just how poorly economists can forecast anything in unstable times (e.g., analysts missed quarterly GDP growth this quarter by a whole 0.5%!). But it doesn’t hurt to postulate radical hypotheses that the fundamentals might actually be sound and see where they get us.


Comments

10 Responses to “Where’s the recession?”

  1. Matt on June 4th, 2009 11:24 am

    Here’s another theory: during the final years of the boom, Australia’s growth rate was constrained by capacity rather than demand. That meant demand could fall quite a lot without affecting output.

  2. Dave55 on June 4th, 2009 11:44 am

    Matt,

    I think there is quite a bit of truth to that observation, particularly in the mining sector.  If anything, the slow down has allowed mining companies to pause and take breath while some of the supply side constraints like ports and rail lines are completed.  Wages have fallen due to decreased competition for employees and with lower fuel costs, profits in the sector remain good.  Meanwhile, all those approved but not commenced mines sit there waiting to go when things pick up.

    While the prices for coal and iron ore have fallen in the past 6 months, they are still higher than 2006-07 levels which we referred to as the “mining boom”.

  3. Simon on June 4th, 2009 6:38 pm

    Couple of worries for me on the recession front.
    1) I’ve got no sense for the margin of error in the GDP numbers, I don’t expect it is 0 so I can see the “real” number being much lower

    2) I strikes me the the recession has been delayed rather than avoided, which I can see leading to a deeper and harsher recession or a long period of stagnation with little or no growth.  China’s energy consumption is still falling despite the GDP numbers.

    3) If supply is the biggest constraint then demand needs to fall far enough in order to free up resources to address the supply constraints.  Again we could see a long period of little growth as resources cannot be effectively reallocated.

  4. hannahhkelly on June 4th, 2009 11:18 pm

    Hi,

    A very nice article indeed! Recession did have an adverse affect on many. And these days, everybody is making strategies so as to survive in the market (I guess “Survival of the Fittest” theory is right)

    Would recommend you to go through this article that I came across, which is about how online display advertising is fighting the recession

    Here is the link -
    http://www.webguild.org/2009/06/online-display-advertising-fights-recession.php?p=p2

  5. Vindication? at catallaxyfiles on June 5th, 2009 8:24 am

    [...] Rudd government are claiming vindication – so too are its supporters. Some of them anyway, others are more cautious. My view on the National Accounts and the stimulus are set out in an op-ed in The [...]

  6. Sukrit on June 12th, 2009 3:39 am

    Your faith in official government statistics might be comforting, but it’s also naive. Actually – no, it’s just sloppy to accept such highly aggregated figures as fact. For readers interested in an alternative set of stats, please check out the information here and here (it’s for the US, but the same principles apply).

  7. VB Liquidity on July 8th, 2009 5:29 pm

    Based on my experience a new bank is what we need.  The banks are acting exactly like the 4 pillars they are meant to be-immovable, stubborn, pig-headed and righteous. They are not lending to small business, they want gold brick clients who don’t need money and will not allow business to free up equity in their properties. The stupid thing is by their very inactivity and battening of the hatches most of their small bus clients will fail as they eat into their equity through lack of growth and improvement of their assets.  It only takes one hole in a wall for a dam to burst, lower the floodgates and see the stampede of businesses to a new bank.

  8. Rossco on July 15th, 2009 4:19 pm

    VB : could not agree more. The 4 pillars may sound like a great idea when the economy is sailing but what happens when (for example) a property developer goes bust and the loan losses become concentrated in the 4 banks….. who steps up to the plate to do the lending to deserving customers. Well in this case probably no-one as foreign banks are pulling out as fast as they can.

    I think this recession will show that the the perception of not taking much risk will be shown to be nonsense…..they may not have built big derivative businesses (and therefore made no money out of them) but owning massive, illiquid, undedged loan books will be the reason thay come back for more capital before too long

  9. liquidmelatonin on July 28th, 2009 1:58 am

    the Economic Recession has been pretty hard on us. some of my friends lost their job because of the massive job cuts. i just hope that our economy becomes better in the following years.

  10. | body detox on August 2nd, 2009 1:51 pm

    the economic recession has been pretty hard on us. there is some good progress on the economy this year. i just hope that the economy will continue to recover in the following months and years.