Before COVID-19, recessions were something associated with less lucky countries or far less fortunate times — at least for Australians under 40.
So the announcement of a recession in September was something of an anticlimax. Things were bad, but they had been bad since March. The unemployment rate rose just 0.1% in September, which, while terrible for those 12,000 or so people, was not as crushing as previous monthly rises.
The announcement of recession did not cause the sky to fall. The streetlights stayed on and, despite over a decade of the Coalition warning of the dire consequences of government debt, the international money markets did not turn off their lines of credit.
Then, just weeks later, we were told by media outlets (particularly the Murdoch-owned press) that the recession was over.
Sky News ran with “COVID RECESSION OVER: RBA forecast economic growth in quarterly statement” — and while the Reserve Bank (RBA) was quick to distance itself from the over-exuberance, such caveats were buried far below the headlines.
Last week the RBA confirmed a serious uptick of 3.3% in GDP growth, taking a significant bite from this year’s losses and again sparking “COVID recession is over” headlines. This is indeed a reason to be optimistic. Yet focusing solely on GDP data is lazy and dangerous, both for economists and journalists.
Just because GDP is growing, that does not mean we are back to any semblance of normality. Around 961,000 people are still out of work, and hundreds of thousands of others have traded full-time permanent contracts for part-time casual work. The economy remains in the deepest period of turmoil since the Great Depression.
There is a legitimate question, then, as to what use the term “recession” is.
One answer is that it’s useful for a certain type of politician when claiming to be a good economic manager. It shows that Australian accounts were in poor shape just twice between 1975 and 2019.
But there are major caveats when looking at GDP growth data: most obviously, it ignores the number of people needed to generate that wealth.
This is no trivial point. If we adjust GDP growth for population, the number of recessions over the 1975-2019 period changes dramatically. Instead of two recessions there are instead nine over that period, and five in the past three decades.
Simply by adjusting GDP for population growth the standard recession measure paints a very different picture to that touted by the “30 years of continuous growth” brigade.
If we look at the depth of the effect of COVID-19 on total GDP rather than GDP growth, the scale of the economic disruption becomes clearer. The economy has essentially lost all economic gains over the past three years, meaning that many years of very high growth will be needed to get Australia back to its pre-crisis GDP level.
And returning to this level does not mean that the crisis is over. The UK experience of the global financial crisis (GFC) is informative on this point. It took roughly five years for UK nominal GPD to return to the pre-GFC level. However, wages did not recover for a further two and a half years.
The point is that economic terms like “recession” are only really useful when they relate to the lived experience of the majority of people.
This year, millions of households have emptied a large portion of their superannuation pots to cover the costs of the recession. Even before the crisis, workers experienced seven years of stagnant wages, while underemployment had been over 8% since 2014. Insecure work had been climbing steadily and company investments were at record lows in 2019.
Clearly the economy was in trouble long before the GDP figures turned negative. A return to “normal” is simply not a possibility.
Luckily, there are alternatives to discussing recessions. For example, the United States uses (among other measures) the “Sahm Rule”, which looks at the level of unemployment relative to the previous 12 months.
This is a far superior measure than GDP or GDP per capita, since it relates the recessions to the labour market experience of the population.
Some economists take this measure further to incorporate underemployment as well as unemployment. By this measure Australia was in recession in 2009-10, and in 2014 when the underemployment levels plateaued at over 8%.
In times of unprecedented crisis, people need a vocabulary to describe what it is they are experiencing. For economists and journalists, this means listening and adjusting our measures accordingly.