One thing you won’t hear Kevin Rudd or Wayne Swan say is: “This is the recession we had to have.”
But in one way, it is. Yes, it’s “the recession foisted on us by those greedy idiots in American banks and their mate Alan Greenspan”, but as yesterday’s national accounts show, we are quickly moving into the debt retrenchment and savings recession we have to have.
If it is a recession, that is. Personally I don’t think recession should be defined simply by movements in gross domestic product; in reality Australia has probably been in recession for more than a quarter and will be in it for at least the rest of 2009.
But it’s worth pointing out that yesterday’s data from the ABS contained a ridiculously large statistical ‘discrepancy’. In theory, the income and expenditure components of GDP should be exactly equal, but because they cannot be measured perfectly, a discrepancy, up or down, is always recorded — and this one was down. It was $1,382 million — one of the biggest drags on December quarter GDP and the largest statistical discrepancy in 15 years. Without it, GDP would have been flat. So whether the Australian economy actually did shrink in the December quarter is a bit of a moot point.
Another point worth making is that, despite all the blather about how the Government is saving us from the global downturn through its quick and perspicacious action, falling government expenditure was a actually big drag on the economy in the December quarter. The private sector grew.
General government consumption was flat and government capital formation fell 3.6%. Household consumption spending grew 0.1% and private capital investment grew 1.3%.
In other words, and to sum up: the December quarter recession was, in fact, the government’s fault and was all a statistical discrepancy anyway.
Nevertheless we do have a problem or two: Australians are now saving, damn it, having reached the eyeballs with debt, and we are also now having a Wyle E. Coyote moment with the terms of trade (that is, the global cliff edge is behind us, we are sailing over thin air, but the national income hasn’t actually started falling yet).
On saving, as Morgan Stanley’s Gerard Minack put it yesterday: “Saving is like heaven: everyone wants to get there but no one wants to die.” That is, saving is a good thing but it is a painful macro-economic shift.
Australians saved $15.1 billion in the December quarter, lifting the savings rate to 8.5%, the highest in 18 years.
The amount saved during 2008, according to Westpac’s economists, was equal to all the savings of the previous 11 years combined, and it subtracted 5% from demand — the largest drag on GDP from savings since 1960.
Much of what was saved in December was handed out by the federal government (even though the recipients were asked to spend it all). From now on saving won’t be so easy, with incomes falling and unemployment rising, but it’s likely that a profound shift in thinking has taken place from spending to thrift, from consumption to saving.
This is a good thing, but it’s going to hurt.
Meanwhile Australia’s terms of trade fell by only 2.8% in the December quarter and as a result real national income remains elevated despite the decline in GDP.
Yet the spot commodity markets are telling us that there are big declines in bulk export prices ahead. Eight of our top ten export destinations are now in recession; the other two are China and India, where growth stalled in the December quarter, although in China at least the government is about to throw more fiscal stimulus at the economy.
The combination in 2009 of rising domestic savings and falling national income due to an overdue drop in the terms of trade mean that Australia is in for a rough ride this year and the next.
And then it’s election time again. Oh dear.